Teva Pharmaceutical: Good Value But Questionable Management?

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By Integer Investments

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).

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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.

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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