Teva Stock Is Still Cheap; Q4 Earnings Should Show Turnaround Progress

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– Reports Q4 2018 results on Wednesday, Feb. 13, after the market close

– Revenue Expectation: $4.53 billion

– EPS Expectation: $0.54

Teva Pharmaceutical (NYSE:TEVA) is showing great momentum this year. Its shares are up about 25 percent so far in 2019, more than 5x the levels the benchmark S&P 500 is up.

Teva is trying to recover from a three-year slump that sent its shares tumbling as the company invested heavily to grow its copycat medicines business.

Teva Stock Is Still Cheap; Q4 Earnings Should Show Turnaround Progress

Teva Pharma (TEVA) 3-year Chart

That happened at a time when margins began to shrink in the U.S. amid fierce competition from other producers. The biggest setback came when Teva lost its monopoly on Copaxone, a blockbuster multiple sclerosis injection that generated half of the company’s profits at one point.

The challenges for the Israel-based generic drug giant are enormous. It has to reduce its massive debt load at a time when generic drug prices are falling in the key U.S. market and new competition for its top-selling multiple sclerosis drug is intensifying.

But we believe Teva’s restructuring program is getting into shape and 2019 will be the year when investors will see it begin to pay off.

In the third quarter CEO Kare Schultz, who has occupied the top slot for more than year now, showed that he is making a solid progress on reducing the company’s leverage and cutting costs. Net borrowings, which peaked in 2016 at around $35 billion, have fallen below $30 billion.

Sales of MS drug Copaxone fell after new competitors emerged, but new product launches like migraine treatment Ajovy will bring in new revenue stream in the next two to three years.

Ajovy won U.S. regulatory approval in September. More than 36 million people suffer from these debilitating episodes and the medicine could generate around $500 million of sales by 2022, according to analysts’ estimates.

Despite these positive signs, a complete turnaround won’t show in the numbers yet. Teva is forecast to report sales down more than 17 percent in the most recent quarter, with earnings per share shrinking to $0.54 from $0.93 in the year-ago period.

Bottom Line

Teva is a good turnaround situation for value investors.

Despite its powerful rally in 2019, the stock is still quite cheap, with a forward price-to-earnings multiple of about 6.9. If the company’s deleveraging and cost cutting continues and new experimental drugs, such as a non-opioid pain treatment, prove successful, we could see Teva’s sales growth revive sooner rather than later.

Teva isn’t fully out of the woods, but for contrarian investors the time to take a chance is now, when the stock is cheap.

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