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Cristiano Bellavitis, Ph.D.
Cristiano Bellavitis, Ph.D.
Articles (8)  | Author's Website |

Teva: Good Value, Questionable Management?

Teva Pharmaceutical shares lost half their value in 2016

January 02, 2017 | About:

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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About the author:

Cristiano Bellavitis, Ph.D.
I am portfolio manager at Integer Investments. We focus on U.S. and European equities with a value/GARP strategy. I am also an assistant professor at the Auckland Business School in New Zealand. I earned a Ph.D. from Cass Business School, City University of London. I apply academic rigor to my investment strategy.

If you want me to follow certain stocks, feel free to get in touch.

Visit Cristiano Bellavitis, Ph.D.'s Website


Rating: 3.5/5 (2 votes)

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Comments

maurodejesus
Maurodejesus premium member - 1 year ago

Thanks for the article. I think management is not only questionable because of M&A, but because the abuse using non Gaap measures to inform shareholders. For example, if you look at the past, you will notice that legal settlements ARE recurring, and if you take an average of the last years, you come up with more than 500 mm of legal costs. But management adds that legal settlement cost to its non Gaap earnings measure. Thats not accurate and shows the are not informing with candor.

Regards Cristiano

Cristiano Bellavitis, Ph.D.
Cristiano Bellavitis, Ph.D. - 1 year ago    Report SPAM

You are very right. We also don't like the use of Non Gaap measures and we have mentioned this in other articles. In general it is a stock that seems to be cheap, but it does not convince us.

Thank you for your comment.

Kind regards,

Cristiano

Please leave your comment:


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