Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) had a very bad 2017. The stock is off 38% in the past 12 months, the dividend has been cut by nearly 75% and there have been significant layoffs, even at its Israel-based labs and offices.
Source: Open Grid Scheduler (Modified)
The government of Israel actually got involved and there were protests in the street because this was a gem of the Israeli business community. TEVA was the largest generic drug manufacturer in the U.S. And it also had a brand drug, Copaxone, that was doing well and represented about 80% of its free cash flow.
But competitors have entered the U.S. generic market; healthcare legislation is stalled so it’s hard to be proactive; and Copaxone is coming off patent, which means generic competition and less secure revenue.
It seemed TEVA was happy whistling past the graveyard for a couple years, trying various acquisitions and strategies to keep it competitive. But that all changed last year.
The CEO was sacked and in came the first non-Israeli CEO the company has had. Kare Schultz, a Danish Novo Nordisk A/S (ADR) (NYSE:NVO) veteran with a solid reputation for rebuilding struggling pharmaceutical firms, took the helm.
By the end of next year, he plans to cut $3 billion from TEVA spending, cut 14,000 workers off the payroll and shut down nearly half of Teva’s 80 facilities around the world.
None of this sounds like the typical stock I would find attractive. However, this is an exemplary contrarian choice.
For too long, TEVA was fiddling while its market influence was burning. For whatever reasons, it wasn’t building toward the future and was thus being left behind.
Schultz has shaken things up. But his draconian methods aren’t the reason to be optimistic. It’s the fact that he has a plan to get TEVA back on its feet and growing again.
And that plan is good enough that Mizuho Bank’s TEVA analyst has now changed her “Neutral” rating to a “Buy” and raised her price expectation from 16 to 23.
TEVA currently holds a market cap of $21 billion, so it’s not exactly a penny stock. This is a substantial player in the generics space, and Copaxone is still making money. There was never any fear it was going to go out of business overnight.
That is what was so shocking when Schultz took over and started to unveil his plan. But he isn’t cutting muscle. He’s looking to build from the core strengths of the business, pay down the massive debt TEVA holds and get the company on track again.
The market seems to like what it’s seeing and hearing — the stock is up almost 9% in the past week of trading.
And even after all this, it is still paying out a 4% dividend that will likely not get cut again. This one won’t make you wealthy overnight, but it is certainly has a lot of long-term potential on both the growth and income sides.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
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