Teva Pharmaceuticals May Be a Speculator’s Dream Stock

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If you’re thinking about investing in generics kingpin Teva (NYSE:TEVA), one read of InvestorPlace contributor David Moadel’s recent article about the company’s legal troubles ought to permanently scare you off TEVA. On Dec. 9, Moadel wrote:

Teva Pharmaceuticals May Be a Speculator’s Dream Stock
Source: JHVEPhoto / Shutterstock.com

I won’t go so far as to consider the company’s legal issues an existential threat. However, they ought to deter any thoughtful investor from taking a long position in Teva stock. Maybe the share price will recover or maybe it won’t. But until the company appeases regulators and restores its reputation, I’d say Teva is nothing but trouble.

If you’re a risk-averse investor, I don’t think my colleague could be any more direct about the risks associated with Teva stock.

However, if you’re a speculative investor, buying a few shares of TEVA stock wouldn’t be the worst thing you could do. Here’s why.

2015 Was a Very Good Year

Teva Pharmaceuticals hit an all-time high of $72.31 in June 2015. That’s 10 times the current share price. Given the difference, one would assume that Teva’s business four years ago was so much stronger than it is today. Sometimes, appearances can be deceiving.

In Teva’s fiscal 2015, it had revenues of $19.7 billion and an operating income of $3.4 billion. In the trailing 12 months ended Sep. 30, it had sales of $17.5 billion and an operating loss of $4.9 billion.

That seems pretty straight forward.

Sales were down 11.2% between 2015 and 2019 while Teva’s operating profit swung from a profit to a loss in those four years. That’s a 244.1% reduction in operating profits for anyone that’s counting.

As revenues go, 2015 wasn’t even a company record — that title goes to 2017 with sales of $22.4 billion — and it wasn’t the company’s best operating profit. That happened a year earlier when it generated an operating profit of $4 billion from $20.3 billion in sales for an operating margin of 19.7%, 240 basis points higher than in 2015.

Yet it was 2015 when investors pushed TEVA stock to an all-time high.

In 2015, Teva traded at 2.8 times sales, 2.6 times book value, and 9.9 times cash flow. Today, it has a price-sales ratio of 0.6, a price-to-book of 0.8, and a price-to-cash-flow of 18.4. In these four years, Teva’s enterprise value dropped almost by half from $69.9 billion in 2015 to $36.9 billion today.

In every way, 2015 was a great year.

Fast Forward to 2020

With just two weeks left in 2019, it’s time to look ahead to 2020 and whether Teva can regain some of the swagger, it had in 2015.

Speaking earlier in 2019, CEO Kare Schultz told Russian business daily Vedomosti that it planned to diversify its business through entering new markets and launching new drugs while continuing to generate 50% of its annual sales from generics.

Also, Schultz wants Teva to get bigger in emerging markets like Russia, Latin America and China to offset sales declines in the U.S. market.

As the company’s biggest branded drug loses market share — Copaxone treats multiple sclerosis — it’s launched Austedo and Ajovy, which treat Huntington’s disease and migraines, respectively.

In the third quarter, those two drugs plus QVAR — the company’s inhalation aerosol for treating asthma — saw sales grow by 94% in North America to $190 million from $98 million a year earlier. That helped offset the 41% North American decline in Copaxone sales during the quarter.

As for generics, North America generated $914 million during the quarter, Europe had $836 million in sales, and the rest of the world contributed $474 million. Together, its generics business contributed 52% of its $4.3 billion in sales.

With new products launching in 2020 and the generics business hanging tough, it’s important to remember that on a non-GAAP basis, Teva’s generated net income of $1.9 billion ($1.78 a share) through the first nine months of 2019.

In addition, it expects to have positive free cash flow of at least $1.7 billion in 2019, with all three geographic regions generating an operating profit.

The Bottom Line on TEVA Stock

Assuming Teva generates $1.7 billion in free cash flow, this would give it an FCF yield of 4.6%, a decent, if not spectacular, valuation.

In 2015, Teva had free cash flow of $4.9 billion. If the company could get halfway back over the next two years to $3.3 billion, it would have an FCF yield of 8.9%, putting it well within value territory.

Is TEVA a screaming value play? No, it’s not. The legal issues alone should keep most sane people on the sideline.

However, as speculative plays go, it’s nowhere near the dumbest buy you could make. Not even close.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/teva-stock-dream-speculation/.

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