LawrenceFeinstein's  Instablog

Jeremy Levin, the former head of Bristol-Meyer Squibbs and Novartis is enjoying his new time as the new CEO of Teva Pharmaceuticals. Taking over the position from Shlomo Yanai , current shareholders and wall street investors should expect more merger activity and rumors coming. Levin has been associated in the past heavily with acquisitions and Teva will be no different. With some easy analysis, one can easily realize that the current price of Teva is nearly 40% undervalued, and should be on the buy-list.

In the fiscal year of 2011, Teva had 18.3 billion in revenue. This represents a 14% gain from the previous year. Conservatively, and realistically we can expect at least 8.5% annual growth over the 5 years.

Then we look at the cost-side of the equation, there are several things to examine, capital expenditures, taxes and operating expenses. Cost of goods sold should be conservatively modeled at 46% of revenue and roughly 24% of SG&A, R&D instead, should be modeled at around 6% as well as 5% for the CAPEX.

In a recent Financial Times article (1), editor in chief Henry Blodget cited an EquityPremier.com (2) note, that broke down this analysis. Blodget noted, that if you take a growth of about 2.5% per annum and discounted backwards, the WACC of 9%, you would yield a value number of roughly $62 a share. This is a represented upside of over 40%. At the current moment, the company trades below ten times our 2012-2013 free cash flow estimate.

The finality of this is obviously deeply rooted in the context of excellent operating, and management health under a focused business strategy.

Disclosure: I do not own TEVA stock, or options, but may begin a long position in the near future.

1. http://www.ft.com/ - FT is a UK-based, equities, market, political, and commentary website with real-time global coverage of all markets.

1. 2. http://www.equitypremier.com/ - Equity Premier is American-based, equities, stock market, and earnings research company with coverage of over 3000 news outlets.