Analysts reassess Teva

Shiri Habib-Valdhorn

As Teva overtakes Check Point to regain the title of most valuable Israeli company, several analysts have revised previous pessimistic targets.

The streamlining plan announced by Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) on Thursday gave a big lift to the company's battered share price, which surged 18.5% on especially high turnovers on Wall Street trading on Thursday and Friday.

Teva's share price closed at $18.60 on Friday, giving it an $18.9 billion market cap. This once again makes Teva the most valuable Israeli company, ahead of Check Point Software Technologies Ltd. (Nasdaq: CHKP), whose market cap is $17.5 billion. Despite the gains, Teva's share price is still 40% lower than its price in August and 72% lower than the share's peak in July 2015.

Teva, managed by CEO Kare Schultz, last Thursday announced a dramatic streamlining plan including 14,000 layoffs, one quarter of its worldwide workforce. 1,700 employees will be laid off in Israel, and Teva's plants in Kiryat Shmona and Ashdod will be put up for sale, as will its SLE distribution company. Teva plans to cut its cost base, projected at $16.1 billion for 2017, by $3 billion by the end of 2019. Teva will make a provision of at least $700 million in 2018 for severance pay and restructuring costs. At the same time, the company announced that it was suspending its dividend.

A number of analysts upgraded their recommendations for Teva in response to the plan, while on the other hand, the Moody's rating agency is re-examining Teva's debt rating, with a possible downgrade in store.

"We believe $3 billion of costs cuts are achievable, given the CEO's track record," wrote Goldman Sachs analyst Jami Rubin in raising her recommendation for Teva's share from "Neutral" to "Buy," with a target price of $20, 7.5% above the market price. Rubin says that investors are skeptical about the strength of Teva's core business, but this is the first time in a long time that Teva has presented a clear strategy for lowering its leverage as its top priority. Rubin notes that the plan includes a lower EBITDA, but says that this will be more than offset by the reduction in the company's cost base.

Credit Suisse has also upgraded its recommendation from "Market underperform" to "Neutral," and has more than doubled its target price, from $8 to $20. Under the headline, "Fast and Furious," analyst Vamil Divan writes, "Schultz is moving quickly to try and turn TEVA around," which he believes will gradually improve sentiment among investors. According to Divan, the plan is more aggressive than expected, but "We await more details on the plan and look for signs of successful execution before getting comfortable enough to fully recommend the stock, but we see things heading in the right direction."

Another investment bank upgrading its recommendation is Morgan Stanley, from "Market underperform" to "Market perform," with an $18 target price, compared with a previous target price of $7 for the share. Analyst David Risinger predicted that many cutbacks would come from existing redundancy at Teva, but that there would also be significant cuts in R&D on original products. IBI Investment House raised its recommendation from "Market perform" to "Market outperform," and its target price from $16 to $21. Analyst Steven Tepper wrote, "In the company's present upheaval, Schultz is still unable to think about a strategy for making the company grow in the long term. What is clear is that at this stage, the company is not abandoning its activity in specialty drugs."

UBS too has raised its price target for Teva, from $12 to $20, retaining a "Neutral" recommendation. "We increase our DCF-derived price target from $12 to $20, driven largely by the larger-than-expected $3 billion in cost reductions that improve operating income/EBITDA. However,we expect the restructuring plan to also have a negative impact on revenues going forward, given the potential for pipeline terminations and product discontinuations as well as a scaled back global footprint and advertising and promotion activities. We have made those adjustments as well.

"The net effect is an expectation of almost no earnings growth for the next four years. The debt is significant, but based on our numbers, the company should not have an issue paying down the debt maturities through the decade, but there is not much left for BD activity to help boost growth. Given the poor growth prospects and based on our DCF analysis, we believe the stock already reflects the restructuring plan (the stock is up 65% since Nov 2) and we remain on the sidelines," writes UBS analyst Marc Goodman.

Oppenheimer, on the other hand, has not changed its "Market perform" recommendation, and analyst Derek Archila predicts that Teva will likely encounter difficulties in carrying out the plan. He says the plan is in any case already priced into Teva's current share price.

Published by Globes [online], Israel Business News - - on December 17, 2017

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