What Is Holding Back Teva from Rising?

Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have recently came across an interesting article regarding Teva Pharmaceutical Industries (NYSE: TEVA), in which the author believes it's worth owning this stock mainly due to its dividend payment and valuation. Nonetheless, I think it's worth noting there are several factors that could pull down the company's value in the months to follow.

Shares of Teva haven't performed well during the year as they fell by nearly 12%. In comparison, the S&P500 rose by almost 13% year-to-date.

The chart below presents the normalized rates of Teva and S&P500 during the year (prices normalized to the beginning of January).

<img src="/media/images/user_12845/teva-snp500-dec_large.jpg" />

The company's recent outlook report for 2013 didn't impress investors as it showed no growth in sales -- during the past four quarters (up to Q3 2012) the company's revenues reached $20.7 billion; the company projects the total sales will reach up to $20.5 billion in 2013. This news could have contributed to the company's stock recent fall. Besides this projection, several other issues could lead to the company's stock to further fall in 2013. Let's explore these issues.

Potential Growth Is Low

Besides the company's projected lack of growth in revenues in 2013, the company's R&D provision seems low compared to other big pharmaceutical companies. This could suggest the company's potential growth in the future from developing new treatments is less likely than its rivals.

The chart below shows the R&D provision as a percentage of net revenues. This chart compares Teva with Pfizer (NYSE: PFE) and Merck (NYSE: MRK). As seen Teva's R&D provision as percent of revenues is the lowest of the three companies. 

<img src="/media/images/user_12845/teva-rnd-2011-2012_large.jpg" />

Even in terms of forward P/E, Teva has the lowest of the three pharmaceutical companies listed above. Currently, Teva's forward P/E is at 7.47. In comparison, Merck's forward P/E is 18.87 and Pfizer's is 10.95. This is another indicator that suggests Teva's growth is estimated to be less than Merck and Pfizer's in 2013.

Dividend

In terms of dividend, the company is offering a relatively low dividend yield compared to other big pharma companies: Teva has recently paid a quarterly divided of $0.26 per share, which represents an annual divided yield of 2.71%. In comparison, Pfizer paid a quarterly divided of $0.22 per share, which represents a divided yield of 3.83%; Merck's divided is set at $0.43 per share per quarter, which comes to a divided yield of 4.14%.

Profitability

The company's operating profitability has recently declined from 25% in the third quarter of 2011 to 21.5% in the third quarter of 2012. If this trend will continue, it could lower the company's attractiveness. 

<img src="/media/images/user_12845/teva-profitablity-2011-2012_large.jpg" />

In regards to the third quarter of 2012, I have adjusted the operating profit to exclude a $1.1 billion provision that mainly consisted of a $670 million provision for "loss contingency" and $481 million for "impaired in-process R&D purchased in the Cephalon acquisition." According to the company's notes for the third quarter reports, the "loss contingency" is related to "pending patent litigation concerning Teva’s generic pantoprazole." Thus, this litigation raises Teva's financial risk.

Financial Risk

At least in terms of debt-to-asset ratio, one indicator for a company's financial risk, Teva is in the middle of the pack compared to other pharmaceutical companies. As of the third quarter the debt-to-asset ratio of Teva reached 0.54. In comparison, Pfizer's debt-to-asset ratio was at 0.55 and Merck's was 0.47.

Further, Teva has recently signed a new $3 billion credit facility to replace its $2.5 billion credit facility. This means the company's liquidity has slightly improved.

The Foolish Bottom Line

Teva's stock hasn't performed well during the year. The company's financial situation is stable but its potential growth and dividend payments are lower than its peers. Moreover, Teva's ongoing litigation poses additional risk for the company. Therefore, I'm not certain the company will be able to turn it around and rally in the months to follow.  

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

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