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1 Stock Warren Buffett Might Have Sold Too Soon

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

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 provides sterile products, high-potency drugs, and cytotoxic substances in various dosage forms.

Warren Buffett initially bought a 1.8% stake in TEVA for $358 million in late 2017. In the first quarter of 2028, Buffett significantly increased its stake in the company. However, "Oracle of Omaha" liquidated his holdings in the generic and branded drugmaker after four years of his initial investment at a loss of approximately $365 million.

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

However, despite heightened volatility this year, TEVA has gained 63.3% in price over the past month and 32.4% over the past six months to close the last trading session at $11.20. The stock has climbed 34.5% year-to-date.

The main catalyst behind a significant surge in the stock price is TEVA’s settlement of its nationwide opioid lawsuit. In late July 2022, the drugmaker announced a $4.35 billion proposed settlement that could resolve 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 an impressive financial outlook for the company over the coming years. Kåre Schultz said, “In the second quarter Teva has delivered a solid performance, despite global macroeconomic headwinds.”

“Our generic and OTC business benefitted from the gradual easing of COVID-19 restrictions in Europe and successful generic launches in the U.S. We also executed well on our key specialty brands, AUSTEDO® and AJOVY®, growing our overall market share. With our strong foundation of generic and OTC business, our focused specialty pipeline and our significant biosimilar pipeline, we are strategically positioned to seize market opportunities and create long term growth,” he added.

Here is what could influence TEVA’s performance in the upcoming months:

Favorable Analyst Estimates

Analysts expect TEVA’s EPS for the fiscal 2022 third quarter (ending September 2022) to come in at $0.62 billion, indicating an increase of 4.8% from the same period in 2021. The $0.58 consensus EPS estimate for the fiscal 2023 first quarter (ending March 2023) indicates a 5.6% year-over-year increase. The company has surpassed the consensus EPS estimates in three of the trailing four quarters.

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

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 of 7.08 compares with the industry average of 14.33.

In addition, TEVA’s forward Price/Sales multiple of 0.81 compares with 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 0.17% industry average. Its trailing-12-month EBITDA margin of 27.49% is 611.7% higher than the 3.86% industry average. 

POWR Ratings Show Promise

TEVA’s overall B rating equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

TEVA has a grade of A for Growth and B for Sentiment, consistent with its revenue and earnings growth estimates. It also has a grade of A for Value, consistent with its lower-than-industry valuation multiples.

TEVA is ranked #22 out of 171 stocks in the Medical-Pharmaceuticals industry.

Beyond what I have stated above, we have also given TEVA grades for Stability, Quality, and Momentum. Get access to all the TEVA ratings here.

Bottom Line

Once a struggling drugmaker, TEVA has experienced a sudden course reversal, gaining in double digits so far this year. TEVA’s $4.35 settlement of its nationwide opioid lawsuit boosted investor sentiment. Furthermore, the company’s prospects look bright owing to its solid generic and OTC business foundation, 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 upsides left, and Berkshire exited its position too soon.

How Does Teva Pharmaceutical Industries Limited (TEVA) Stack Up Against its Peers?

TEVA has an overall POWR Rating of B. One could also check out these other stocks within the Medical-Pharmaceuticals industry with an A (Strong Buy) rating: Johnson & Johnson (JNJ), Novartis AG (NVS), and Merck & Co. Inc. (MRK).

TEVA shares fell $0.11 (-0.98%) in premarket trading Tuesday. Year-to-date, TEVA has gained 38.45%, versus a -9.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

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


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