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3 Reasons Why Beaten-Up Teva Stock Could Have a Big 2020

In the big picture, pharmaceutical giant Teva Pharmaceuticals (NYSE:TEVA) has been a disaster over the past several years. From 2015 to 2019, revenues, profits, and the Teva stock price all plunged as the company’s highly-levered, acquisition-driven growth strategy came off the rails amid mounting pricing and regulatory pressures on the core generics business.

3 Reasons Why Beaten-Up Teva Stock Could Have a Big 2020

Source: JHVEPhoto / Shutterstock.com

But, Teva has shown some signs of life recently. Over the past six months, shares are up a jaw-dropping 80%, mostly because investors are finally starting to see a light at the end of this dark tunnel.

Where’s that light coming from? Signs of core generics business stabilization. Promise surrounding the new drug pipeline. Margin improvements from huge expense base reductions. Significant de-leveraging.

All of these favorable developments will persist in 2020. As they do, the light at the end of the tunnel will get brighter, and Teva (which remains dirt cheap) will stay red hot.

3 Big Catalysts for Teva

In 2020, three big catalysts lay the groundwork for Teva stock to have a great year.

First, generics business stabilization coupled with new drug launches will spark revenue improvements. As many know, Teva’s revenues have been in free fall for several years amid mounting regulatory, demand, and pricing pressures against the company’s core generics business.

Over the past few quarters, however, the generics business started to stabilize as regulatory, demand, and pricing pressures have eased. This stabilization, coupled with new product launches from Ajovy and Austedo, should end the multi-year decline in Teva’s revenues.

Instead, starting in 2020, revenues should start rising again. This important inflection from negative to positive revenue growth will help support continued strength.

Second, significant operational restructuring has laid the foundation for margin improvement. That is, Teva has closed several manufacturing sites, offices, and labs over the past few years, the sum of which has gutted about $3 billion from the expense base.

Reduced expenses have yet to have a positive impact on profits because revenues are in free-fall. But, once revenues stop dropping in 2020, these cost cuts will create big tailwinds for profit growth.

Third, sustained de-leveraging of the balance sheet creates room for significant multiple expansion. Teva stock is so cheap (only 5-times forward earnings) because there’s so much debt on the balance sheet (net debt stood at roughly $25 billion last quarter). But, net debt levels have dropped about 25% over the past two years. They will keep dropping in 2020. As they do, investor sentiment should improve, and that should spark significant expansion in the stock’s multiple.

Teva Stock Is Too Cheap

Above all else, Teva can go way higher in 2020 because shares remain so cheap.

At about 5-times forward earnings, Teva is among one of the cheapest stocks in the market today. Granted, a lot of that cheapness is because of too little growth and too much debt. But, in 2020, growth trends will improve while debt levels will decrease. This should support big gains in the stock through profit growth and multiple expansion.

Just look at the numbers. Profits have been steadily dropping. But, thanks to fundamental trend improvements, profits are supposed to stabilize and even grow in 2020 and 2021. Consensus 2021 profit estimates sit around $2.60 per share.

Meanwhile, before the generics business started tumbling, Teva was trading around 11-times forward earnings. If it rebounds to that multiple, then this stock could be looking at a 2020 price target of nearly $30.

I doubt Teva will get back to trading at 11-times forward earnings in 2020. But, that’s not the point. The point is that thanks to profit growth and multiple expansion potential, Teva stock could fly higher this year.

Bottom Line on TEVA Stock

The big Teva rebound has already started thanks to fundamental trend improvements, successfully restructuring efforts and significant deleveraging. All of those favorable developments will continue in 2020. As they do, Teva stock will keep rebounding.

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

Article printed from InvestorPlace Media, https://investorplace.com/2020/02/beaten-up-teva-stock-big-2020/.

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