Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) got a bond credit rating downgrade on Friday, and yet shares went unscathed by investors. Guggenheim analyst Rohit Vanjani explains from the sidelines, noting that while the investment grade was cut to speculative for Teva’s debt rating, this was a move “largely expected,” and as such, he predicts “investor sentiment will likely be unchanged.”
“We expect S&P to cut its rating as well, which will further lift interest rates. Our understanding is that each ratings agency downgrade to ‘high yield’ yields ~12.5bps towards a higher interest rate. Additionally, reports indicate that Allergan’s stake in Teva now stands at ~6.8% (vs. previous 9.9%). We expect continued share selling in 1Q18, with completion of the sale in 2018,” highlights Vanjani.
However, do not mistake Vanjani’s lack of surprise for positivity here. This is still, after all, an Israeli pharma giant that is drowning in debt and rising competition in the generics market.
The analyst contends, “The downgrade was due to a significant debt burden and an expected ‘prolonged period of earnings erosion,’ driven by increased Copaxone competition and U.S. generics exposure. The environment will put Teva at risk of tripping its covenants in 2018 (provided no further credit amendments are made). We note that Fitch downgraded Teva to speculative status as well on 11/06/17, from BBB- to BB. S&P currently assigns Teva a credit rating of BBB-, at the border of speculative, but we expect a similar downgrade to come.”
Having already baked in debt ratings downgrades into his expectations, Vanjani maintains his projections, including his interest expense estimate for fiscal 2018 of $975 million.
As such, the analyst reiterates a Neutral rating on TEVA stock without suggesting a price target. (To watch Vanjani’s track record, click here)
TipRanks points to an analyst consensus that backs Vanjani’s play-it-safe stance on this beleaguered biotech giant. Consider the opinions of 22 analysts in the last 3 months, a majority lining up on the sidelines, very much split between the bulls and the bears: 6 rate a Buy on Teva stock, 12 maintain a Hold, and 4 issue a Sell on the stock. With a loss potential of 13%, the stock’s consensus target price stands at $19.12.