Should You Trade or Invest in Teva Pharmaceutical Industries Ltd (ADR)? Thoughts from a Bear

RBC Capital's Randall Stanicky wonders how strong is Teva's long-term value investor support to be able to "absorb" a guidance misstep?


RBC Capital analyst Randall Stanicky poses a “bull/bear debate” on the troubled Israeli pharma giant Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) ahead of the forthcoming guide due February 8th.

On the one hand, the analyst acknowledges, “TEVA’s new CEO has done a solid job making tough decisions and communicating an aggressive but straightforward plan to the Street. And that turnaround enthusiasm is reflected in the stock +53% since 10/30 change in leadership and ensuing cost cut announcements.”

As time rolls around to the new guide, Stanicky believes until then, “P&L outlook will drive the stock,” leaving the analyst maintaining a “cautious” perspective from the bearish camp.

Therefore, the analyst reiterates an Underperform rating on TEVA stock with a $13 price target, which implies a close to 38% downside from current levels. (To watch Stanicky’s track record, click here)

“Is TEVA strength based on short term momentum money or long term value investor support? This is an important question relative to set-up and ability to absorb a potential disappointing guide. […] focus is now shifting to a realistic multi-year P&L outlook and TEVA’s ability to manage through revenue headwinds while pursuing aggressive cost cuts leaving what we view as a tough setup into guidance,” writes Stanicky.

For 2018 revenue and EBITDA, with the Street angling for $19.5 billion from Teva in revenue and $5.3 billion in EBITDA, the analyst calculates a midpoint under $19 billion in revenue and $5 billion in EBITDA.

Following the release of the 2018 guide, the analyst notes Teva’s “ability to ‘grow’ off of rebased 2018 EBITDA on cost cutting support will also be important.” On a wary note, the analyst struggles to see Teva achieving short-term revenue gains, forecasting a 6% dip in 2020 from 2018 compared to the Street’s more confident 3-year revenue and EBITDA CAGR of 1% and 3% rises. Additionally, the analyst is more bearish than the Street on the domestic generics segment for the company.

Though February 8th will be a catalyst for TEVA stock, following the release of guidance, Stanicky fears “there are fewer near-term catalysts” lying ahead. Though some “FDA action” on the company’s CGRP migraine drug fremanezumab is anticipated by the middle of this year, the analyst likewise keeps his eyes open to the prospects for “another generic Copaxone competitor that could come at any time and will likely be built into guidance.” Keep in mind, Stanicky points out, should guidance prove to be a “disappointment,” the valuation of the stock can take a hit back to the market floor.

TipRanks suggests this beleaguered Israeli pharma giant has a long road to recovery ahead, including winning over Wall Street once more. Out of 22 analysts polled in the last 3 months, 5 are bullish on Teva stock, 13 remain sidelined, while 4 are bearish on the stock. With a loss potential of nearly 6%, the stock’s consensus target price stands at $19.73.

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