Teva
We like Teva for three reasons. First, despite being in the generic segment where it is difficult to gain a competitive advantage, we believe that Teva has an advantage over its competitors, namely because of its size. Second, the company is growing. Unfortunately, most of this growth is coming from M&A activity. EPS has been $1.49 in 2013, $3.56 in 2014 and $1.82 in 2015 (5.46 non-GAAP).
Third, despite its growth and good fundamentals, the stock price has plummeted. This year it has lost 45%. It is now trading close to its 52-week low. Is there something wrong with the company? Honestly, the company has problems, but it is also very cheap. We need to evaluate the pros and cons.
Valuation
From 2010 to 2015, Teva traded at an average P/E multiple of 17.3. It now trades at 8.36X 2016 and 6.9X 2017 forecasted earnings. Simply Wall St, based on a cashflow model, values the company at $62 per share, a steep premium compared to the current $36.
Conclusion
We believe that the pharmaceutical sector has received too much negative attention. We believe that Teva is in a position to thrive in the generic market, and that it is priced very attractively. Yet, we don’t like the management's aggressive M&A strategy. We don’t like very aggressive companies since large acquisitions rarely create value for the shareholders. Analysts argue that Teva has overpaid Actavis (its latest and largest acquisition) by at least $14 billion. A full version of this article can be found here.
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