With a daily gain of 3.98% and a three-month gain of 41.85%, Teva Pharmaceutical Industries Ltd (TEVA, Financial) has been grabbing attention in the stock market. However, despite these impressive figures, the company reported a Loss Per Share of $2. Is the stock significantly overvalued? This article will provide an in-depth analysis of Teva Pharmaceutical Industries (TEVA) to help answer this question. Read on for a comprehensive valuation analysis.
Teva Pharmaceutical Industries, an Israel-based company, holds the title of the world's leading generic drug manufacturer. With a significant presence in North America, Europe, Japan, Russia, and Israel, Teva Pharmaceutical Industries accounts for a high-single-digit percentage of the total number of generic prescriptions in the U.S. The company boasts a portfolio of innovative medicines and biosimilars in three main therapeutic areas: central nervous system, respiratory, and oncology. Additionally, Teva sells active pharmaceutical ingredients, offers contract manufacturing services, and owns Anda, a U.S.-based generic and specialty drug distributor.
Despite its current market price of $10.7 per share and a market cap of $12.30 billion, the GF Value, our estimate of fair value, stands at $7.94. This discrepancy suggests that Teva Pharmaceutical Industries stock may be significantly overvalued.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. We believe that the stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Given these parameters, we believe that Teva Pharmaceutical Industries Ltd (TEVA, Financial) is significantly overvalued. As a result, the long-term return of its stock is likely to be much lower than its future business growth.
Evaluating Financial Strength
Before investing in a company's stock, it's crucial to assess its financial strength. Investing in companies with poor financial strength carries a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are reliable indicators of a company's financial strength. Teva Pharmaceutical Industries has a cash-to-debt ratio of 0.13, which is lower than 80.26% of 1059 companies in the Drug Manufacturers industry. This ratio suggests that the financial strength of Teva Pharmaceutical Industries is poor.
Profitability and Growth
Investing in profitable companies typically carries less risk, particularly if the company has demonstrated consistent profitability over the long term. Teva Pharmaceutical Industries has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $15 billion and a Loss Per Share of $2. Its operating margin of 16.96% is better than 78.3% of 1046 companies in the Drug Manufacturers industry. Overall, GuruFocus ranks Teva Pharmaceutical Industries's profitability as fair.
One of the most crucial factors in a company's valuation is growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Teva Pharmaceutical Industries is -4.6%, which ranks worse than 77.81% of 924 companies in the Drug Manufacturers industry. The 3-year average EBITDA growth is 0%, which ranks worse than 0% of 890 companies in the Drug Manufacturers industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) is another effective way to evaluate its profitability. The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Teva Pharmaceutical Industries's ROIC was 7.18 while its WACC came in at 5.42.
In summary, the stock of Teva Pharmaceutical Industries (TEVA, Financial) is believed to be significantly overvalued. The company's financial condition is poor, and its profitability is fair. Its growth ranks worse than 0% of 890 companies in the Drug Manufacturers industry. To learn more about Teva Pharmaceutical Industries stock, you can check out its 30-Year Financials here.
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