Analysts: Buffett believes Schultz can revive Teva

Shiri Habib-Valdhorn

Teva's share price leaped after it was revealed that Berkshire Hathaway bought a 1.8% stake in the company.

Two weeks ago, the share price of Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) fell 4.4% in New York trading following an announcement by Berkshire Hathaway (the investment company of renowned financial guru Warren Buffett, the oracle from Omaha), Amazon, and JP Morgan, that they would found a health company to provide health services to their employees. The measure was perceived as increasing competition in the US health market.

It turned out, however, that Berkshire Hathaway was a shareholder in Teva, and the investment company's official announcement of this yesterday propelled Teva's share price into an 8.6% gain in late Wall Street trading, with the share price reaching $21, followed by a similar result on the Tel Aviv Stock Exchange (TASE) today.

Each quarter, funds and investment institutions are required to report their holdings in companies listed on Wall Street within 45 days of the end of the quarter. Berkshire Hathaway's report yesterday to the US Securities and Exchange Commission (SEC) revealed the fund's first-ever investment in Teva. According to the report, at the end of 2017, Buffett's fund held 18.9 million Teva shares (actually, American Depositary Receipts - ADRs- a security traded on the US exchanges that follows the share of a foreign company), amounting to 1.8% of Teva's shares.

A shot in the arm for shareholders

The 8.6% leap in Teva's share price in late trading came after it had already advanced 4.4% in regular trading. At the new share price, Berkshire Hathaway's holding in Teva is worth $396 million.

The report of Buffett's investment is a shot in the arm for Teva's shareholders, following several negative reports in recent days that pushed the share price down below $20, cutting short an upward trend in the share since it hit a low point in November.

Teva included another huge write-down for goodwill in its generics business in its fourth quarter report, and its guidance for 2018 was weak. At the same time, it was learned that a delay in the launching of Teva's ethical drug for treatment of migraine headaches was possible.

Then S&P downgraded Teva's debt rating to junk bond status and Momenta announced that it was launching a generic version of 40-milligram Copaxone earlier than expected.

"Buffett's investment in Teva's share indicates his confidence in Teva's new CEO, Kare Schultz, and in his ability to succeed in the company's large-scale restructuring plan, after having already succeeded in a major streamlining effort at Danish company Lundbeck," Bank of Jerusalem (TASE: JBNK) head of global trading desk and FX Ilan Sterk says. "It appears that Buffett, who invests in value shares with strong management and a strong cash flow, sees value in the company, which generated $3.5 billion in cash flow in the last quarter, despite its $32.5 billion debt."

Sterk adds that Buffett's investment in the fourth quarter was at an average price of $18.94 per share, while the share price's range in the quarter was $11-19. "At the beginning of the quarter, the share price was $19, and later touched $11 following publication of the company's third quarter results and the downward revision of its annual guidance. The share was traded at $18.95 at the end of the quarter, so it appears that Buffet's investment took place towards the end of the quarter, because had it been at the beginning of the quarter, Buffet would probably have bought more shares at a lower price during the quarter."

According to Sterk, one example of Berkshire Hathaway's investment thesis, which includes investment in companies with strong management and a strong cash flow that return money to investors through dividends and buyback programs, is Apple. "In the most recent quarter, Berkshire Hathaway increased its holdings in Apple by 23.3% to 3.34% of the company's shares. The investment in Apple represents an investment in an innovative technology company that is changing the way many of the world's people consume, and that has strong management, led by Tim Cook. Apple generated $28.3 billion in cash flow from current activity in the last quarter, and returned $14.5 billion to investors," Sterk says. He recommends keeping track of Berkshire Hathaway's holdings in Teva, "because Berkshire Hathaway adjusts its holdings every quarter."

"The investment does not soothe Teva's problems"

Citi also commented today on Buffett's investment in Teva. Analyst Liav Abraham writes, "While the thesis behind the Oracle of Omaha’s investment in Teva is unknown at this point, Berkshire Hathaway’s value investment approach is well-known for its focus on companies with quality businesses, visible cash flow generation, and strong management teams.

She adds, "While Berkshire’s investment in Teva by no means alleviates the near-term issues at the company, it is nonetheless supportive of our thesis that the company is taking the right steps to execute on a successful turnaround and generate sufficient cash flow to de-lever at a more rapid pace than anticipated by the Street… Although the near-term pressure on the topline is expected to continue, given the ongoing pressure in its US generics business and the incremental generic competition to the Copaxone franchise, Teva’s core generics franchise benefits from scale, durability, and the ability to develop complex generic drugs."

Teva is not Buffett's first investment in an Israeli company. A far more substantial investment was his acquisition of metal cutting tools manufacturer Iscar from the Wertheimer family. Berkshire Hathaway bought 80% of the company's shares for $4 billion in 2006, and acquired the remaining 20% for $2 billion seven years later, meaning that the company's value doubled.

Published by Globes [online], Israel Business News - - on February 15, 2018

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