Teva, headquartered in Petach Tikva, Israel, is the world’s largest generic drug company and trades as an ADR under the symbol (TEVA). The company reported earnings Tuesday that were in fact up strongly on strong revenue growth exceeding 30%, and it also raised its dividend by 17%. [Read Teva's Q409 earnings call transcript here.] Yet interestingly, the stock was down on an up day. This is due to Teva's missing analyst expectations by a mere penny. Oh, the peculiar illogic of Wall Street.
Let’s look at this above-average consistent earnings grower from the perspective of our F.A.S.T.™ graphs (Fundamentals Analyzer Software Tool) with figure 1 below plotting earnings only.
Figure 1 TEVA 11yr EPS Growth (Click to enlarge)
As can be seen with figure 1, the compound average earnings growth rate for Teva since 2000 is 29.2%. Also, based on company guidance and consensus forecast the expected earnings growth for 2010 is between 30-35%. With figure 2, we overlay monthly closing stock prices that indicate that Teva is, on a historical basis, undervalued with a PE ratio below 17, almost a third lower than normal (blue line with asterisks) and approximately half of next year’s forecast growth rate.
Figure 2 TEVA 11yr EPS Growth correlated to Price (Click to enlarge)
With a current yield exceeding 1% after Tuesday’s announced increase, this remains in our view an undervalued growth story with a dividend kicker. As can be seen with figure 3, Teva has dramatically outperformed the broader S&P 500 on a capital appreciation basis. The dividend cash flow table illustrates a good record of dividend increases as well.
Figure 3 TEVA 11yr Dividend and Price Performance (Click to enlarge)
By providing essential fundamentals-at-a-glance, we believe that our F.A.S.T.™ graphs (Fundamentals Analyzer Software Tool), in an instant, speak volumes about a company and how well it’s been historically managed. In short, they assist in determining whether a more comprehensive research effort is warranted. The above F.A.S.T.™ graphs and charts on TEVA indicate a stock worth learning more about.
Thesis for Growth
TEVA has a great track record and we believe exceptional prospects for future growth as well. We base our view on what we perceive as a good balance between high growth generics (currently 70% of its pharmaceutical business) and higher-margin branded drugs (currently 30% of its pharmaceutical business).
Generics
Regarding generics, management expects strong growth out to 2015 based on four key drivers:
An aging population consuming more drugs.
Health Care reform that favors the cost savings from generics.
In excess of $150 billion of branded drugs going off-patent in the next five years.
Strong generic growth in developing countries.
TEVA remains the clear leader in the U.S. pharmaceutical market and has been widening the gap versus its competitors. With a strong commitment to R&D spending and a staff in excess of 1,000 people, TEVA has a strong pipeline. This includes 216 ANDA’s (Abbreviated New Drug Applications) and 139 Paragraph IV filings and 89 first-to-file listings.
Based on TEVA’s scale in technology and breadth of manufacturing plants, its goal is to almost double U.S. market share from 18% in 2007 to over 35% share by 2015. TEVA also has its sights on the rapidly expanding European and Latin American markets as well. Governments and payers are driving generic growth in all of these markets. Biosimilars is another rapidly expanding market that TEVA- through acquisitions- is well-positioned to exploit.
Branded
Teva’s branded business, currently representing 30% of pharmaceutical revenues, offers excellent growth potential. Copaxone for multiple sclerosis and Azilect for Parkinson’s are the pharmaceutical's branded leaders. Copaxone generated strong growth in the U.S. and abroad. Additionally, extended usages are in various stages of trials. Azilect also showed strong growth in all markets. Other brands in respiratory and women’s health were also strong contributors to growth.
Pharmaceuticals make up approximately 95% of sales. Teva also produces some 300 active pharmaceutical ingredients (API). This division, although small, is an important contributor at approximately 5% of sales.
Acquisitions & Licensing Agreements
In addition to gains in market share, acquisitions remain a top priority for Teva Management. The recent acquisition of Barr Pharmaceuticals expanded Teva’s presence in the U.S. and other key markets. Teva’s strict criteria that an acquisition possesses a strategic fit and compelling economics that will be accretive within one year are supportive of profitable growth.
Numerous licensing agreements and strategic alliances promise to expand both the company's branded and generic offerings. Licensing also is expanding Teva's geographical reach in important markets such as Japan as well.
Conclusion
We feel that Teva is one of the best positioned pharmaceutical companies to profitably participate in a rapidly changing worldwide healthcare landscape. In the U.S. pharmaceutical industry, Teva is number one in most categories. In the UK, Netherlands and Italy it is also number one. In France, Spain, Hungary, Poland and the Czech Republic, the company ranks 3rd after rising from 10th in 2007.
Consequently, we believe Teva is an excellent choice for predictable above-average growth at a reasonable price. A growing dividend only adds to the company's appeal.
Disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Disclosure: Long TEVA at time of writing.
Teva's Q409 earnings call transcript
