Going by historical performance, Teva Pharmaceuticals stock (NYSE: TEVA) could offer upside of over 40% from the current levels. Our conclusion is based on our detailed analysis comparing Teva’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis. That said, in the case of Teva, attractive valuation could well be a trap, as we discuss below.
TEVA stock trades at $9 currently and it is down 4% so far this year. It is also down 30% from the pre-Covid high of $13 seen in February. In addition, TEVA stock has gained 25% from the low of $7 seen in March 2020, as the Fed stimulus largely put investor concerns about the near-term survival of companies to rest.
However, the road ahead for Teva is surely going to be tough, primarily due to the legal issues around price-fixing and charitable donations that may have violated anti-kickback law. The company’s revenues have also been on a decline from $21.8 billion in 2017 to $16.9 billion in 2019. Furthermore, its Net Margin declined from 18.2% to 15.6% on a Non-GAAP basis. Other than legal issues and declining profits, Teva’s debt levels of over $26 billion also appear to be very high given the company has just $2.4 billion in cash and it generated $578 million in cash from operations for the six months period ending June 2020.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid a Saudi-led price war
- From 3/24/2020: S&P 500 recovers 57% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)
Teva vs S&P 500 Performance Over 2007-08 Financial Crisis
TEVA stock didn’t decline and remained at levels of around $37 from September 2007 (pre-crisis peak) to March 2009 (as the markets bottomed out). It rallied post the 2008 crisis, to levels of about $47 in early 2010, rising by 27% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% followed by a recovery of 48%.
Teva’s Fundamentals in Recent Years Look Weak
Teva’s Revenue declined from $21.9 billion in 2016 to $16.9 billion in 2019. The company’s margins on a GAAP basis contracted from 0.3% in 2016 to -5.9% in 2019, resulting in EPS of $(0.91) in 2019 compared to $0.07 in 2016. While the company’s Q2 2020 revenues were 7% below the level seen a year ago, the EPS figure improved from $(0.63) in the prior-year quarter to $0.13 in Q2 2020.
Does Teva Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
Teva’s total debt decreased from $35.8 billion in 2016 to $26.3 billion at the end of Q2 2020, while its total cash increased from $1.9 billion to $2.4 billion over the same period. The company also generated $578 million in cash from its operations in the first half of 2020, and it appears like the company will weather the current crisis.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment.
Going by the historical performance, we believe that TEVA stock has roughly 40% room for growth in the near future. That said, long term investors should weigh the risks associated with the business as discussed above.
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
See all Trefis Price Estimates and Download Trefis Data here
What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams