Prescription For Your Portfolio: Teva Pharmaceuticals

Jun.20.13 | About: Teva Pharmaceutical (TEVA)

Investors have scrambled to find low risk, income generating stocks this year, but there are some good candidates that have yet to participate in the rally. Teva Pharmaceutical Industries (NASDAQ:TEVA) is one such candidate. Its longer-term stock chart is an unusual one; the stock had a remarkably muted reaction to the financial crisis of 2008-2009, went on to set record highs in early 2010, but has been trending down since.

Teva - 5 year stock chart

A Good Company in a Good Industry

Teva is well known as the world's largest generic drug company. Generics are on the better side of the so-called "patent cliff" that the major drug companies now face. As many major drug patents expire, the generics will swoop in with cheaper substitutes. This year and the next are big years in terms of patent expirations, which bodes well for generics in the next few years. Cost pressures in health care systems in many countries will lead to continuing pressures on doctors to prescribe cheaper generic drugs, when available. Teva is well positioned here due to its size and infrastructure, not least so in terms of entry into emerging markets, the most promising area for long-term growth.

Teva is not strictly a generic drug company, but also the world's 11th largest specialty drug manufacturer. It is here that Teva will run into challenges in the coming years. Most notably Copaxone, a multiple sclerosis drug, contributes 20% of Teva's revenue and a larger share of its profits. Copaxone is coming off patent in 2015, which is the most likely reason that Teva's valuation has remained subdued. While Teva is sure to take a hit when Copaxone comes off patent, the company's long-term opportunities should not be forgotten. As others have pointed out on Seeking Alpha, Teva does have a significant development pipeline.

Teva's strategy going forward is a conservative one. The company will no longer be engaging in large acquisitions, but rather focusing on increasing operational efficiency (potential for cost savings are estimated to be between $1.5 and 2.0 billion) and increasing its global presence, particularly in emerging markets.

Teva - Use of cashClick to enlarge

Source: Company presentation

While a pharmaceutical company's pipeline is always a source of some uncertainty, I believe Teva has a limited downside from current prices. Financial leverage is fairly low (roughly 2X EBITDA), valuation is modest (forward P/E is 7.3), and management's strategy has taken a conservative turn away from large acquisitions. The 26 analysts covering the company estimate that earnings per share in 2014 will be between 4.91 and 5.94 dollars per share -- not too wide a range, and even at the lower end of the range an investment can be made with a decent margin of safety.

For investors who are not enticed by low and rising bond yields and prefer to generate income by staying near the safer end of the stock spectrum, Teva is certainly worth a look. At the time of writing, its dividend yield is 2.9%.

Disclosure: I am long TEVA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.