What repels most investors’ interest frequently piques mine.
To wit: A stock that has lost 52% of its value since early 2016 has piqued my interest. Given its price action over the past year, I would easily enough argue that the stock has repelled more interest than it has piqued. (After all, the price has been continually lowered by sellers to attract buyers.)
Teva Pharmaceutical Industries (NYSE: TEVA) is the repellent stock to which I refer. Teva investors entered 2016 owning shares (technically, American Depositary Receipts) that traded around $65. Those same shares traded around $32 to enter 2017. They trade around $31 today.
Of course, price in isolation is meaningless. It reveals nothing about value. But price relative to a variable — say, dividend yield — at least offers a reference point. Teva’s deflated price has elevated its dividend yield to 4.3% ̶ the most remunerative among its industry peers.
A Heavyweight in Pharma
Israel-based Teva, as the full name implies, is a pharmaceutical company; it’s one of the largest pharmaceutical companies in the world. It is the largest generic pharmaceutical company.
Generic pharmaceuticals and related products account for 55% of Teva’s annual revenue; branded drugs account for 45%. As for revenue, Teva recorded $21.9 billion of it in 2016. Teva management has been ambitious, if anything, in achieving $21.9 billion. Annual revenue has doubled since 2007.
Growth comes organically through internally generated projects. Mostly, it comes through a conduit of acquisitions. None is larger than the $40.5 billion Teva paid to acquire Allergan’s (NYSE: AGN) global generics business, Actavis Generics, last August.
Ambitious growth through acquisition can be a blessing or a curse . . . or both. Where Teva’s shares trade today, veteran Teva investors would likely argue it has been mostly a curse.
Teva has financed its acquisition over the years with a mixture of equity and debt. On the former, nearly 100 million additional shares were issued to buy Actavis. But most of the acquisitions were financed with debt. Long-term debt ballooned to $32.5 billion at the end of 2016 compared with $8.4 billion at the end of 2015. Most of the debt was used to buy Actavis.
Big acquisitions are frequently saddled with big expenses. Teva reported $4.9 billion in special charges related to Actavis. Most of these charges were reported in the fourth quarter of 2016, which produced a quarterly loss of $1.11 per share. The loss dropped full-year EPS to $0.07 compared with $1.82 in 2015.
Investors could quickly discount the negatives associated with equity dilution and the increased financial risk that the debt binge brings. But if one takes the long view, risk appears commensurate with reward. Teva has bought growth businesses that are also profitable businesses. The top and bottom lines will benefit.
Investors can be forgiven for failing to envision the future benefits. Immediate distractions abound.
Teva’s CEO resigned in February. Teva has yet to find a replacement. The day the resignation was announced, $1.5 billion of equity market value evaporated.
Viability of Teva’s principal branded drug Copaxone further distracts. Copaxone will confront competition for the first time this year on the as loss of its patent protection. Copaxone sales are expected to fall to $3.2 billion, down from $4.2 billion in 2016.
So, the question is “why”? Why consider a stock that’s down 52% since early 2016, that’s plagued numerous problems ̶ both endogenous and exogenous?
Teva Shares: Value and Yield
The answer distills to value and yield.
I mentioned that acquisitions will drive growth. They already are. Teva’s revenue leaped forward in the fourth quarter, thanks in large part to the Actavis acquisition. Revenue for the quarter posted at $6.5 billion, a 33% increase from the $4.9 billion posted in the year-earlier quarter.
The Actavis acquisition stimulated a barrage of special charges, to be sure, but the barrage was a one-off pummeling. EPS is expected to recover to post at $1.06 for the first quarter of 2017.
More recovery is on the way: Teva targets EPS to fall between $4.90 and $5.30 for the year. I’ll take the conservative route and say $5. This means that Teva shares trade at 6.5 times 2017 EPS estimates (price relative to earnings being metric measure), which is below its peers and near the lowest point in its history. (The prior low was 5.9 times in 2011, and that was a buying opportunity.)
Teva shares are cheap in absolute terms; more important, they’re cheap relative to projected earnings and the current dividend yield. The last time Teva shares were this relatively cheap, they doubled over the subsequent four years.