1 share Warren Buffett may have sold too early

Warren Buffett’s diversified holding company Berkshire Hathaway exited its position in drugmaker TEVA by the end of 2021 with a loss of roughly $365 million on its four-year bet. However, Buffett appears to have exited the stock prematurely as TEVA witnessed a significant reversal this year, gaining 34.5% year-to-date. Additionally, the company is well positioned to capitalize on its generic and OTC business, specialty pipeline and biosimilar pipeline. Read on to learn our view….

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Headquartered in Tel Aviv-Yafo, Israel, Teva Pharmaceutical Industries Limited (TEVA) is a leading pharmaceutical company that develops, manufactures, markets and distributes generic medicines, specialty medicines and biopharmaceutical products internationally. The company also supplies sterile products, highly potent drugs and chemotherapy in various dosage forms.

Warren Buffett initially purchased a 1.8% stake in TEVA for $358 million in late 2017. In the first quarter of 2028, Buffett significantly increased his stake in the company. However, the “Oracle of Omaha” liquidated his holdings in the generic and branded drug maker after four years of his original investment at a loss of approximately $365 million.

Earlier this year, Buffett’s Berkshire Hathaways (BRK.A) (BRK.B) 13F filings with the Securities and Exchange Commission revealed that it had offloaded its entire position to 42.8 million TEVA shares in the fourth quarter of 2021.

However, despite increased volatility this year, TEVA has rallied 63.3% in price over the past month and 32.4% over the past six months to end the last trading session at $11.20. The share has risen 34.5% so far this year.

The most important catalyst behind a significant increase in the share price is TEVA’s settlement in the nationwide opioid lawsuit. At the end of July 2022, the drug manufacturer announced a $4.35 billion proposed settlement that could settle thousands of lawsuits over its alleged role in the U.S. opioid epidemic. TEVA must pay up to $3.7 billion in cash over 13 years and provide nearly $1.2 billion in generic naloxone over a 10-year period.

Furthermore, TEVA’s president and CEO, Kåre Schultz, and his team hinted at impressive financial prospects for the company in the coming years. Kåre Schultz said: “In the second quarter, Teva delivered a solid performance, despite global macroeconomic headwinds.”

“Our generic and OTC business benefited from the gradual easing of COVID-19 restrictions in Europe and successful generic launches in the US. We also achieved good results on our key specialty brands, AUSTEDO® and AJOVY®, increasing our overall market share. With our strong foundation of generic and OTC businesses, our focused specialty pipeline and our significant biosimilar pipeline, we are strategically positioned to seize market opportunities and drive long-term growth,” he added.

Here’s what could affect TEVA’s performance in the coming months:

Favorable analyst estimates

Analysts expect TEVA’s Q3 2022 (ending Sep 2022) EPS to come in at $0.62 billion, indicating an increase of 4.8% from the same period in 2021. The consensus EPS estimate of $0.58 for first quarter 2023 (ends March 2023) ) indicates an increase of 5.6% year-on-year. The company has exceeded consensus estimates for EPS in three of the last four quarters.

In addition, TEVA’s revenue and EPS for fiscal year 2023 (ending December 2023) are expected to rise by 1.7% and 0.8%, respectively, year-over-year.

Discounted valuation

In terms of forward non-GAAP P/E, TEVA’s 4.33x is 78% lower than the 19.64x industry average. The stock’s 2.19x forward EV/Sales is 50.4% lower than the 4.42x industry average. Also, its forward EV/EBITDA multiple is 7.08 compared to the industry average of 14.33.

Additionally, TEVA’s forward Price/Sales multiple is 0.81 compared to the industry average of 5.10. Its 1.13x forward Price/Book is 61.3% lower than the 2.92x industry average.

High profitability

TEVA’s trailing 12-month EBIT margin of 18.88% is 10,873.9% higher than the industry average of 0.17%. It is 12 months later EBITDA margin at 27.49%, 611.7% is higher than the industry average of 3.86%.

POWR rankings show promise

TEVA’s overall B rating corresponds to a buy this spring POWR Ratings system. The POWR ratings are calculated by taking into account 118 different factors, with each factor weighted optimally.

TEVA is graded A for growth and B for sentiment, in line with estimates for earnings and revenue growth. It also has an A grade for value, consistent with its lower-than-industry valuation multiples.

TEVA is ranked #22 out of 171 stocks in Medical-pharmaceutical products industry.

In addition to what I have mentioned above, we have also given TEVA grades for stability, quality and momentum. Access all TEVA assessments here.

The bottom line

Once a struggling drugmaker, TEVA has experienced a sudden turnaround, earning double digits so far this year. TEVA’s $4.35 settlement in the nationwide opioid lawsuit boosted investor sentiment. Furthermore, the company’s outlook looks bright due to its solid generic and OTC business fundamentals, focused specialty pipeline and significant biosimilar pipeline.

Given the company’s solid revenue and earnings growth estimates, lower-than-industry valuation and high profitability, the stock has plenty of upside left, and Berkshire exited its position prematurely.

How Teva Pharmaceutical Industries Limited (TEVA) works Stack up against their peers?

TEVA has an overall POWR rating of B. You can also check out these other medical-pharmaceutical stocks with an A (strong buy): Johnson & Johnson (JNJ), Novartis AG (NVS), and Merck & Co. Inc. (MRK).

TEVA shares fell $0.11 (-0.98%) in premarket trading on Tuesday. So far this year, TEVA has risen 38.45%, against a -9.20% rise in the benchmark S&P 500 in the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s great interest in the stock market led her to become an investment researcher and financial journalist. Using his fundamental approach to analyzing stocks, Mangeet tries to help retail investors understand the underlying factors before making investment decisions.


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