Teva Stock Was a Good Buy Last Fall, but It Topped out After This Rally

Beating on earnings, Teva’s (NYSE:TEVA) fortunes are clearly improving. With opioid litigation risks looking less dire than predicted, a key factor holding down Teva stock is starting to dissipate. But, with shares moving from under $10/share to over $12.50/share, is more upside possible in the near-term?

Teva Stock Was a Good Buy Last Fall, but It Topped out After This Rally

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Yes and no. Shares aren’t as cheap as they were last fall, but, that doesn’t rule out further upside. CEO Kåre Schultz’s turnaround is in motion. With debt coming down, and margins going up, TEVA could move higher in the coming year.

Add in some promising drugs in the pipeline, and Teva’s future looks bright. With volatility hitting the markets, let’s dive in and see what’s the verdict with TEVA stock.

Why TEVA Stock Could Move Higher

Earlier this month, Teva released earnings for the period ending Dec. 31, 2019. In their results, the company highlighted how it met 2019 guidance. Teva’s restructuring has been a success. Already improving operating cash flow, there’s room for additional improvements in profitability.

Operating margins are on track to improve. 2019 saw operating margins of 24.5%. But, according to guidance, margins could improve to 28% by 2023. Regarding product growth, Teva projects a strong 2020 for movement disorder drug Austedo and migraine treatment Ajovy.

Guidance calls for Austedo sales to grow from $412 million in 2019 to $650 million in 2020. Ajovy’s sales are set to grow more than two-fold, from $96 million in 2019, to $250 million in 2020.

All these factors could mean higher prices for TEVA in the coming years. Each factor could work in tandem to enhance shareholder value. With improved drug sales, and a reduced cost structure, Teva can maximize operating cash flow. With increased cash flow, Teva can continue its debt reduction program. Teva reduced outstanding debt by $2.2 billion alone in 2019.

Based on several valuation metrics, however, Teva shares look fairly priced. The company has a forward non-GAAP price-to-earnings (P/E) ratio of 5.4. In comparison, fellow generic drug maker Mylan (NASDAQ:MYL) trades for 4.9 times forward non-GAAP earnings.

TEVA stock sells at a higher EBITDA multiple than Mylan. Teva’s trailing twelve-month (TTM) EV/EBITDA ratio is 9.2, versus 6.8 for Mylan. However, this may not be apples-to-apples. Mylan shares have moved lower due to market pessimism over their upcoming merger with Pfizer’s (NYSE:PFE) off-patent drug business.

However, valuation is just one concern. There are other factors at play that could make TEVA stock not worth the trouble at the current price.

Why TEVA Stock Could Move Lower

Despite recent good news, there’s plenty of reason why TEVA stock could move lower. The first is the overhanging opioid litigation risks. As I’ve previously discussed, Teva has a plan to settle its opioid liabilities, but the company is not out of the woods. State and local prosecutors did not sign onto the deal.

In other words, TEVA stock still has material opioid litigation risk. The company may be “cautiously optimistic” a deal can be reached before March’s opioid trial in New York. A similar offer from drug distributors was rejected. Yet, this doesn’t mean a settlement is out of the question.

Recent reports indicate prospective opioid payouts could be lower than anticipated. Prosecutors may be more open to a deal. On their terms. Teva may have to raise the ante regarding a settlement in order to resolve this issue.

Whether that will make or break TEVA stock remains to be seen. The company may have to increase its settlement amount. But, putting a price on this uncertainty could help move shares higher.

Outside of opioid issues, another issue is growth. Austedo and Ajovy may see a nice sales bump in 2020. But, as InvestorPlace’s Chris Markoch discussed Feb. 14, this may not make up for decreased sales of multiple sclerosis drug Copaxone.

Yet, overall sales are no longer in decline. Between 2018 and 2019, revenues fell from $18.85 billion to $16.89 billion. For 2020, sales appear to be treading water, with estimates of $16.86 billion in sales. 2021 projections also call for water-treading results ($16.92 billion in sales).

If the company exceeds these low expectations, TEVA stock could head higher. But, for now, it appears the company will at least stay steady as it continues on its debt reduction plan.

The Bottom Line on TEVA Stock

TEVA was a great contrarian play last fall. With opioid liabilities hanging like an anvil over the company, shares were priced for disaster. More than doubling from their 2019 lows, I wouldn’t say Teva shares are now “priced to perfection,” but the current share price may be pricing in much of the upside.

Bottom Line? Consider TEVA stock a hold. With markets facing volatility, a better entry point could spring up down the road.

Thomas Niel, InvestorPlace contributor, as been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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