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Rebounding Teva Stock Could Climb Higher, But Risks Remain

Since last month, Teva Pharmaceuticals (NYSE:TEVA) stock has been rebounding. TEVA stock price has surged from $6.97 at the open on Oct. 1 to $10.34 at the close on Nov. 18, an 48.3% gain.

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The company’s opioid litigation situation is improving. With this key risk minimized, TEVA stock price is getting back on track.

But after the big gains TEVA stock price posted in recent weeks, can the shares climb further? The company’s opioid situation is improving. But additional challenges are impacting the company. Yet, facing low expectations, TEVA stock could climb more in the near-term.

Are TEVA Stock’s Opioid Problems Over?

A key driver of the performance of TEVA stock price has been the company’s potential settlement of its opioid litigation. InvestorPlace’s Josh Enomoto wrote in a  Nov. 8 column that the company has offered to donate $23 billion worth of opioid addiction treatment drugs to settle litigation by U.S. governments. Under the deal, Teva would also pay a $250 million penalty.

$23 billion looks like a big number compared to Teva’s market cap ($10.2 billion). But $23 billion is based on the opioid addiction treatment drugs’ list price, not the company’s manufacturing costs. Compared to the fate of Purdue Pharma, under this deal Teva would get out fairly unscathed.

But only four states attorneys general agreed to the proposed settlement, while 17 municipalities flat out rejected it. Despite this, I believe state and local jurisdictions will eventually agree to a settlement. Based on the recent Oklahoma judgement against Johnson & Johnson (NYSE:JNJ) described by Barron’s, it does not appear that state and local governments can extract more money from opioid makers by going to trial. “Take the money and run” may be their best option.

TEVA stock faces another litigation risk. Federal and state authorities are investigating the company for  fixing the prices of generic drugs. As Teva’s CEO was quoted as saying in the Barron’s article, these risks could linger for some time.

Even though Teva’s opioid situation is improving,  some analysts still aren’t bullish on TEVA stock. JP Morgan’s Chris Schott recently upgraded Teva Pharmaceuticals stock to “neutral” from “underweight”. The analyst noted that Teva’s “near to mid-term fundamentals are stabilizing,” but he remains “fairly bearish on the longer-term setup.” His main concern is the company’s high debt and lack of growth drivers.

Indeed, legal risks aren’t the only issue weighing on TEVA stock price. The company’s heavy debt and weak performance continue to hold down Teva Pharmaceuticals stock.

Lack of Growth Is Impacting Teva

The shares trade close to their 20-year lows, but  TEVA stock price isn’t exactly cheap. The company’s forward non-GAAP price-earnings (P/E) ratio is 3.9. But Teva’s heavy debt load skews this figure. Based on its enterprise value/EBITDA (EV/EBITDA) ratio, Teva’s valuation is not so low. Teva’s EV/EBITDA is 8.6, higher than Mylan’s (NASDAQ:MYL) EV/EBITDA of 6.3. Another major generic drug maker, Dr. Reddy’s (NYSE:RDY) has  an EBITDA multiple  of 11.6. But Dr. Reddy’s does not have the high debt and legal issues of Teva.

However, Teva’s cost reduction plan could improve its margins. The potential opioid settlement also helps investors estimate the company’s legal risks. But the bottom line is not the only area worthy of consideration. Teva’s tepid top-line performance is another risk factor.

Sales declines remain an issue. In 2017,  Teva’s sales were $22.4 billion. In the last 12 months, they were down to $17.5 billion.

Teva announced its third-quarter earnings on Nov. 7. Its Q3 sales were down 6% year-over-year. Its earnings per share sank 14%, due to $468 million of charges related to a legal settlement.

Debt is another risk area for Teva Pharmaceuticals stock. Costly acquisitions burdened the company with too much debt. But Teva has lowered its debt.

In the past nine months alone, its short and long-term debt has fallen from $28.9 billion to $26.9 billion. Teva has sold assets to raise cash that it’s used for debt repayment.

It could sell more assets in the future. But that could be a double-edged sword. Teva could be selling off its strongest assets to save the ship. The pressure could intensify as $6 billion of its debt comes due between now and 2021.

Teva Stock Is a Contrarian Play, But Consider the Risks

With opioid settlements on the horizon, the future looks brighter for Teva Pharmaceuticals stock. But the recent rally reflects this growing optimism. Teva stock trades at a low forward P/E ratio, but its EV/EBITDA metric indicates that Teva is not super cheap.

But Teva’s margins could improve, thanks to its cost reduction measures. Even a small amount of profitability improvements could cause TEVA stock price to shoot higher.

TEVA stock is a contrarian play. The market continues to write off the company. It’s a stock rife with risks. Teva is almost out of the woods with opioids, but nothing is set in stone. Teva must recover from its other ailment, debt. Investors who are looking for a high risk, high-return opportunity should consider Teva stock.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media,

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