There’s no denying that today’s earnings report is not good news for Israel-based Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), the world’s largest generic drug maker and the largest company in Israel.
TEVA stock is off 25%, just today; 35% year to date. It missed on both earnings and revenue. It guided lower for the rest of the year. And it cuts its dividend.
What’s Going On With TEVA Stock?
That kind of news usually is a big red flashing SELL signal. But this is precisely the time when the contrarian investor digs deeper and looks to see why such a major industry player has reported such unimpressive numbers.
Maybe it is the beginning of the end, or maybe some short-term problems have accumulated that are overblown, and a great stock is now oversold.
At this point, I fall into the latter camp.
Each thing that is happening to TEVA today is certainly cause for a selloff. But the fact is, this isn’t a long, slow goodbye. This company with a $24 billion market cap is not going to shrivel up and blow away.
Granted, it’s trading a current price-to-earnings ratio of 302, so it certainly has some overly enthusiastic investors in it. But that also means, this kind of valuation was going to have to come down at some point and usually in the pharma sector it’s not going to be the earnings that catch up to the price.
There a few things that are in the way of TEVA right now.
First, it lost both its CEO and CFO earlier this year in a cloud of controversy. That never helps when a company should be fully focused on its market share and growing competition. But that has been resolved and the new CEO needs some time to fix the problems that were left by the old leadership. This ship doesn’t turnaround in a quarter or two.
Second, with healthcare reform in the U.S. — TEVA’s largest market — still in limbo, and new competitors entering the market, it has hurt TEVA’s revenue. Again, this is a leadership problem, and it’s now being addressed.
Third, Venezuela. This was a solid market for TEVA and with the chaos there deepening, TEVA has had to eat most of its business there, which amounted to hundreds of millions in lost revenue.
Fourth, short sellers are piling in. What this means is, there are now powerful forces that are looking to profit from all the bad news in the stock. If more bad news comes out, they pile more money in.
But that strategy is very dynamic. As we have seen with Tesla Inc (NASDAQ:TSLA), if the short sellers get caught when the stock begins to rise, the corresponding “short squeeze” will launch the stock higher quickly.
Fifth, the smaller generic firms are all having challenges here. Dr.Reddy’s Laboratories Ltd (ADR) (NYSE:RDY) and Novartis AG (ADR)’s (NYSE:NVS) Sandoz generics division are having the same issues in the US market. This isn’t a problem solely for TEVA.
All that said, the simple fact is, there is much more upside than downside left in TEVA. The problems are being addressed with a management team and the worst has been faced. Buy when there’s blood in the streets — this is deep cut, not a mortal wound.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.