Is TEVA a Pain Before the Gain?

Dear PGM Blog reader,

In this weekend blog article, we want to take the opportunity to discuss with you, the current situation regarding TEVA Pharmaceutical Industries, (NYSE: TEVA) for which its shares has fallen approximate 83 percent in the past 22 months as can be seen from below 2-year chart.

 

INTRODUCTION:

Teva Pharmaceutical Industries Ltd. (NYSE and TASE: TEVA) is a leading global pharmaceutical company that delivers high-quality, patient-centric healthcare solutions used by approximately 200 million patients in 60 markets every day.

The company is headquartered in Petah Tikva, Israel, Teva is the world’s largest generic medicines producer, leveraging its portfolio of more than 1,800 molecules to produce a wide range of generic products in nearly every therapeutic area.

In specialty medicines, Teva has the world-leading innovative treatment for multiple sclerosis as well as late-stage development programs for other disorders of the central nervous system, including movement disorders, migraine, pain and neurodegenerative conditions, as well as a broad portfolio of respiratory products.

Teva is leveraging its generics and specialty capabilities in order to seek new ways of addressing unmet patient needs by combining drug development with devices, services and technologies. Teva’s net revenues in 2016 were US$21.9 billion.

TEVA Q3-2017 FINANCIAL RESULTS:

On Thursday, November 2, 2019, the company reported its Q3-2017 financial results.

Highlights:

  • Revenues of US$5.6 billion, up 1% compared to the third quarter of 2016.
  • GAAP gross profit was $2.6 billion in the third quarter of 2017, down 6% compared to the third quarter of 2016.
    • GAAP gross profit margin was 47.1% in the third quarter of 2017, compared to 50.4% in the third quarter of 2016.
  • GAAP operating income in the third quarter of 2017 was US$378 million, compared to operating income of US$$765 million in the third quarter of 2016.
  • Cash flow from operations generated during the third quarter of 2017 was US$1.1 billion, compared to US$1.5 billion in the third quarter of 2016.
    • Earnings per share (EPS) excluding one-time items of US$1.00, down from US$1.31 a year earlier
  • Free cash flow, excluding net capital expenditures, was US$0.9 billion, compared to US$1.2 billion in the third quarter of 2016.
  • The companies debt, as of September 30, 2017 was US$34.7 billion, compared to $35.1 billion at June 30, 2017.
  • Total balance sheet assets amounted to US$86.1 billion as of September 30, 2017, compared to US$86.4 billion as of June 30, 2017.
  • Total shareholders’ equity was US$30.3 billion as of September 30, 2017, compared to US$29.6 billion as of June 30, 2017
    • On October 31, 2017, the Board of Directors declared a cash dividend of US$0.085 per ordinary share for the third quarter of 2017, for which the record date will be November 28, 2017, and the payment date will be December 12, 2017.

PGM CAPITAL COMMENTS & ANALYSIS:

Although the company’s Q3-2017, results were broadly in line with analyst forecasts of US$1.02 EPS ex-items on revenue of US$5.6 billion, traders slaughter the shares of the company with approx. 20 percent on Thursday November 2nd 2017, as can be seen from below chart.

The main reason for the haircut of last Thursday is that the company lowered its full-year EPS forecasts to US$3.77 – US$3.87 from US$4.30 – US$4.5 and its revenue forecast to US$22.2 – $22.3 billion from US$22.8 – US$23.2 billion.

Analysts had been expecting a full-year EPS of US$4.19 on revenue of US$22.6 billion.

The main reason for the company’s share price to fall from US$ 66,32 of December 21, 2015 to a low of almost US$ 11.00, is mainly due to the fact that TEVA is a highly-leveraged company which faced a large one-off goodwill impairment.

The fact that the company was able to reduce its debt in the third quarter and subsequently increase its share holder equity.

Based on the Company’s Q3-2017 results and its closing price of Friday, November 3rd 2017, the shares of the company has a forward P/E ratio of 3.14, a P/B of 0.48 and a dividend yield of 7.88 percent, we humbly feel that this is a great opportunity for investors to participate in this Free Cash Flow generative business without paying a large price for its shares.

Below quote of Warren Buffett might be applicable, in the sense that may be its time be greedy on the shares of TEVA.

Last but not least keep in mind below quote of John Maynard Keynes, might also be applicable to the shares of TEVA.

Yours sincerely,

Eric Panneflek

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