Investors To Focus On Low P/E, High Growth Teva Pharmaceutical?

For the latest news on your stock picks, connect with us on Facebook and follow us on Twitter. Sign up here for our exclusive investment round-up delivered directly to your email! We make investing easy!

Teva Pharmaceutical Industries Limited (TEVA)     10/9/2012            Last Price: $40.34

VIEW:  BUY

Headquartered in Israel, Teva Pharmaceutical is the world’s largest generic pharmaceutical manufacturer with operations in 60 countries. Teva operates 53 finished dosage sites, 17 research and development centers, and 21 active pharmaceutical ingredient manufacturing sites. The company also develops and sells branded pharmaceuticals, including Copaxone, one of the world’s leading multiple sclerosis drugs. Branded drug sales represent approximately 37% of revenue.

Highlights:

Teva Pharmaceutical Industries Limited (TEVA) closed Monday’s trading session at $40.34. In the past year, the stock has hit a 52-week low of $36.88 and 52-week high of $46.65. Technical indicators for the stock are Bullish.

GROWTH AND BALANCE SHEET

The company’s annual earnings growth rate over the past five years is 36.75% gives us a strong positive feeling. TEVA’s EPS growth for this quarter relative to the same quarter a year earlier is 54.69%, reiterates the fundamental strength of the company. Second quarter revenues increased 18.6% to $4.99 billion. The total Debt/Equity of 61.73% makes us feel uncomfortable, but the competitors are at the same level.  The company’s sales mix by geographic regions comprises 49% from the United States, 30% from Europe, and the remaining 21% from the rest of the world.

VALUATION

Teva’s business strategy is to keep things simple. The company filed more patent challenges than any other generic pharmaceutical company. Rather than waiting for patents to expire, Teva files challenges which, when successful, allow it to produce the “challenged” drug for 180 days without other generic competition. A P/E of 11.83 is turning the heat on. The stock is currently trading 35% below its fair value.  The firm has been able to maintain or grow its dividend every year since 1990. The beta of 0.73 implies the low volatility of the stock with respect to the S&P 500.

RECOMMENDATION for next 6 months: We initiate our BUY TEVA Pharmaceutical undervalued stock. The company has demonstrated a pattern of Bullish technical signs and strong fundamental performance. We believe it offers a superior risk-reward scenario versus its competitors in the generic pharmaceutical space. The stock has significant potential to move upwards, as it is already trading at low multiples

For trading we suggest a long call at prices above $44.

NEWS and CALENDAR

Tuesday, October 8, 8:00 AM New Data Presented at the 28th ECTRIMS Congress Showcase Teva’s Ongoing Commitment to Multiple Sclerosis Research.

Thursday, Oct 4, 2012 2:59 PM Teva Pharmaceutical Industries Ltd (TEVA) recently announced a deal that will expand the company’s central nervous system (CNS) pipeline. Teva acquired all rights, assets and obligations relating to Huntexil (pridopidine / ACR16) from NeuroSearch. Huntexil is being developed for the symptomatic treatment of hand movement, balance and gait disturbances in Huntington disease (HD).

Wednesday, October 3, 3:35 PM The FDA has withdrawn approval of Impax (IPXL -1%) and Teva’s (TEVA -0.5%) Budeprion XL 300 mg, saying it’s reviewed new data that indicates it’s not therapeutically equivalent to Wellbutrin XL 300 mg.

TEVA Strengths

• Filed more patent challenges than any other generic pharmaceutical company.
• Multi-National Operations and Subsidiaries
• Niche Market Leader
• Resist much of the pricing pressure that effects other companies.

TEVA Weakness

• Teva loses ground as others grow
• Threat of new entrants
• Teva faces law suits from brand manufacturers
• Increase in competition
• Currency fluctuations may result in a gain or drag upon conversion to US Dollars.

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

TEVA intrinsic value is $55.00 the current price is $40.34, that gives us a possible upside of 35%.

Financials

The financial health of the company the higher the better

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

According to this model, each year’s EPS numbers should be better than the previous year’s. One dip is allowed, but the following year’s earnings should be a new high. TEVA, annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.36, 075, 2.23, 3.66, 3.09, is acceptable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

TEVA’s Total Debt/Equity of 61.73% is very high.

Quarterly EPS Change (This Quarter VS. Same Quarter Last Year)

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 18% that this model likes to see for a “good” growth company.

TEVA’s EPS growth for this quarter relative to the same quarter a year earlier is 54.69% well above our target.

Annual Earnings Growth

This model looks for annual earnings growth above 12%, but prefers higher than 20%.

TEVA’s annual earnings growth rate over the past five years is 36.75%, is well above our target growth.

Current Price Level

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

TEVA’s 52 week high is $46.65 current price is $40.30

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a P/E ratio of 11.30, below the average industry P/E ratio of 13.00 and well below the S&P 500 P/E ratio of 17.7

Insider Ownership

When there is strong insider ownership which I define as 12% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 23.12% of JBHT stock. Management’s representation is not large enough. This satisfies the minimum requirement, and companies that do pass this test are more attractive.

Technical Analysis

I am using several technical indicators (MACD, RSI, MFI, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

Commodity Channel Index (CCI) is bullish for TEVA. Bullish Macd Crossover signal.

Our indicators give a bullish view on TEVA