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Teva: Value Trap


  • Teva's debt downgrade looks likely to be on the cards.
  • Management has little control over its financials.
  • The stock might actually be overvalued.

Investment Thesis

I was previously bullish Teva (NYSE:TEVA) while not being a shareholder. Now, I'm totally bearish but ended up being a shareholder. Which is ironic. Teva's Q3 2017 results were so much worse than I had been expecting. Well, not so much their results, but its guidance and management's total inability to understand and forecast their business.

In my previous article, a few weeks back, I wrote,

Teva could generate recurring cash flow in 2017 of $4 billion, down from the original $4.4-4.6 billion in its August forecast. Then, for 2018, its cash flow could have a run rate of $3 billion - a realistic estimate once competition for Copaxone has had time to properly ramp up their own sales.

Yesterday's results show that this forecast of mine was just too optimistic. No matter how conservative I tried to be at $4 billion in cash for the full year 2017, in hindsight, it was nothing short of fallacious. The company's outcome is, now just too speculative.

Its Debt Position

Let's face this squarely on. In spite of Teva shedding several assets which the company claims are non-core, these will only bring in $2.3 billion by the end of Q4 2017. While these asset sales are significantly higher than they were originally earmarked to bring in, nevertheless, this cash is just a drop in ocean.

Further compounding issues, is the fact that management no longer believes that Teva will be able to substantially bring down their debt in 2017. Originally, $5 billion was estimated to be brought down. In the earnings call yesterday this figure has now been revised downwards to $3.5 billion to $4 billion. Having a bit better understanding of Teva's inability to forecast its own cash flows, let me assume that in the best case they pay off $3.5 billion - which should not be too hard, since they

This article was written by

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Analyst’s Disclosure: I am/we are 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.

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