Teva (ADR: TEVA) has been a darling for investors in the generic drug sector. Even as recently as last year, investors were eager to see the growth of the company and along with it, the stock price. But then second quarter earnings were reported and Teva stock price hit the fan as they say.
Teva stock price has since cratered 45% since earnings were released and there is no sign of the price coming back. So should investors, particularly value investors take a look at Teva?
In this post, we will look at Teva stock and see whether or not there is a value play here or if you are better served putting your investing dollars elsewhere.
Teva Stock Drops After Earnings
Just looking at the raw numbers, the earnings Teva reported don’t appear to be terrible. Revenue came in at $5.69 billion, missing by $40 million. But this was an increase of 13%. Earnings per share also missed estimates by $0.05, coming in at $1.02.
But a closer look shows the full picture. Net income was down 20%. Cash flow was down 23%. Then executives pulled the plug. They slashed earnings estimates for the full year and cut the dividend by 75%.
So what exactly happened?
The Issues With Teva Stock
There are a handful of issues at play here when it comes to Teva stock. First, management is partly to blame. When Teva bought Actavis Generics from Allergan, they touted the added revenue and the cost savings that would come. Unfortunately, they drank too much of their own potion and really had no chance of meeting expectations.
But the issues don’t end there. Here are other issues Teva is facing.
- Consolidation: many of Teva’s customers are consolidating, which is lowering the revenue the company plans to earn in the future.
- Competition: there is more competition for generic drugs. This is leading to cost cutting and lowering potential revenue.
- Decline in specialty drugs: many of Teva’s specialty drugs have experienced a year over year sales decline and there is no sign of sales picking up any time soon.
- Slower to market: a handful of the drugs in the pipeline are being delayed which is putting added pressure on the company and Teva stock price.
- Increase in debt: the debt burden of Teva has now eclipsed $35 billion, which puts pressure on earnings
- Search for CEO: the company is still searching for a permanent CEO, so the company is in a sense meandering along until a new leader takes over.
And then there is the issue with Allergen. When Teva bought Acatvis Generics, part of the deal was in stock. So Allergen became the largest shareholder of Teva stock. At the time of the deal, there was a restriction on when Allergen could sell their shares.
That holding period has now passed. And with Teva stock price down 50% from when Allergen bought it, only one wonders if they want to cut ties now with the troubled generic drug maker.
Is There A Value Play?
The question is, is there any reason for a value investor to invest in Teva? At this point, I can’t think of one. The reason being is that there is nothing in the immediate horizon that will cause the stock price to jump.
If anything, the stock price will trade in a small range for some time. Over the long term however, Teva does have some things going for it. They have 5 new drugs on the horizon that can add to the bottom line.
But in the meantime, the company needs to find a permanent CEO and start to work on reducing its debt load. They have started some cost saving initiatives by laying off thousands, but this will only put a dent in the issues with Teva.
I would hold off on investing in Teva for a few months and re-evaluate how things are progressing. Keys will be earnings for the third quarter and full year to see if the company is making headway on increasing earnings and revenues.
If it can quickly turn things around, Allergen will likely continue to hold on to its shares hoping to earn some losses back, which would take away the downward pressure and fears that they will sell everything and drive the stock price lower.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.