Psychology a Factor in Investors' Caution Toward Teva

I have received a review of Teva written by Leader Capital Markets analyst Yoav Burgan, entitled “Teva - How much longer will investors shed tears?” This review is, I feel, exceptionally clear both in tone and accuracy, and it certainly gives a full and comprehensive picture of the only real public company to originate from these shores.

The problem with this excellent review, however, is that it will never be read by the people who need to decide whether or not to make the volume of investment that could move Teva’s stock. They won’t read anything resembling it either, since the only reviews they see are those written by leading analysts at the top investment houses in the U.S., and Leader, with all due respect, is still not in that league. Still, I have no doubt that once they regain their sobriety after Christmas and New Year's, the distinguished analysts in the U.S. will realize the value they are allowing to go to waste when they advise their customers to stay on the sidelines and not take advantage of falls in price to buy Teva’s shares.

Two issues are at the root of the problem with Teva’s stock (as opposed to the company, which suffers from no such malaise and is making its usual progress). The first has to do with psychology, which Burgan details quite eloquently. He calls it the “growth paradox.” Teva’s business growth in 2006 will make 2007 look insignificant by comparison. 2006 was a record year thanks to the expiry of patent protection on three ethical drugs, Zocor, Zoloft, and Pravachol, a development that allowed generic companies like Teva to market versions of their own. It’s not as if the analysts weren’t expecting this; quite the contrary. But they are now claiming these events will spoil 2007.

“It may well be that in order to placate Wall Street, Teva should have tried to roll over as much as possible its major generic launches into 2007,” Burgan writes. What should a business company give priority to, Wall Street or its own business? This, as it happens, is one of the reasons why so many public companies are interested in buyout offers from giant private equity groups. I won’t go into Burgan’s analysis in depth, but the bottom line is perfectly clear. If you take all the variables that determine valuations for companies like Teva, you can only arrive at one conclusion: At its current price, Teva represents a real good deal.

The other issue affecting Teva is the temporary vacuum caused by the departure of incumbent CEO Israel Makov, and the arrival at the beginning of next year of his successor, Shlomo Yanai. I’ve written about this before, and the problem, as I see it, has nothing to with the individuals themselves. The big shareholders know Makov well, but they know nothing about Yanai, not that I have heard any complaints about him. The bone of contention here relates to the handover process, or lack of it. I think chairman Eli Hurvitz will have a key role to play here.

If Yanai is indeed a good manager with the requisite skills for the post (after all, one could hardly believe that Eli Hurvitz would back an idiot), then Hurvitz’s handling of the changeover is the crucial element here, since -- with all due respect to the other names, and notwithstanding the fact that he has not played a hands-on role in management role for the last five years -- Hurvitz still towers above the rest, including Israel Makov. If he wants to reassure the company’s big shareholders, Hurvitz will have to make sure himself that Yanai steps into shoes that fit. If he does this, everything should proceed without a hitch, assuming Yanai has what it takes to run a company like Teva.

Speaking frankly, I am not sure we’ll see the stock climb again in the near future, since a situation has evolved at Teva that has everything to do with Wall Street and that is completely detached from Main Street. This can be seen in the number of “Buy” ratings from analysts, which have now fallen to only nine from 12 last month and 14 in October. This is especially striking given that Teva is trading at a lower multiple than any of its competitors. I haven’t seen Teva trading at a premium for years, and I feel that the premise that 2007 will be pale by comparison to the extraordinary 2006 does not carry all that much importance, since they’ll soon be assessing Teva on the basis of projections for 2008.

If Teva wants to overcome the crisis in its stock, its CFO Dan Suesskind should take Eli Hurvitz and do the rounds at leading institutionals in Europe and the U.S. This will ease investors’ and analysts' jitters, and that is what’s important to Wall Street. There’s nothing to be done on Main Street since everything is in order over there.

TEVA 1-year chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.