Stock recommendation project economics major

1. In this report, it will be no more than 4-pages doubled spaced (verbiage only). Of course, if pictures and graphs are included it will be longer. But the verbiage portion should be generally no more than 4-pages doubled spaced. This would equate to approximately 2-pages per investment theme.

2. Clearly state your idea and the security/stock used to express that idea.

3. Fundamental analysis: include supportive evidence including, macro-economic backdrop germane to your idea, industry/sector specific data, and finally firm-level.

4. Technical analysis: the timing aspects of your idea will include, “the when” everything in above #3 will happen. For example, your idea and security/stock may be a good investment idea but “the when” to take that investment theme live and go into a trade is a different story. For example, since Q3 2016 macro-economic data has soften and peaking but has not peaked. Although the economic backdrop lends itself well for a short-bias investment strategy, the data has not peaked. Simply we are nearing a recession, but the recession has not materialized which is an essential element for a short-bias strategy. Simply, a self-directed-active-aggressive investor may decide to short various markets, just simply “not now.”

5. Model development: You will use at a minimum two-stage technical analysis of the security you are using to express your investment idea. The two-stage process simply means you are using two rules to time your investment. Example of S&P 500 that we are currently developing in class.

6. Conclusion: reiterate your findings without bias to “sell” me on the idea that your particular investment idea will work

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The macroeconomic data is good actually. FED should leave the interest rate low for longer period of time and the data coming from labor market is quite well. The PMI indicators improved and the situation on labor market is quite good with employment rate at the level of lower than 4.0%. The industry has good prospects for the long term. Healthcare sector and its segment drug manufacturers are well positioned for the ageing population in US. There may be also increased share of the healthcare seen in the rest of the world as it is actually under the US level. As a result of that fact, the industry size and profitability may increase in the long-term horizon. The thread may come from government that may try to regulate it due its impact on the society. Regarding the fundamentals, the company seems to be not fundamentally well based according to the first sight. The net income was negative at the level more than 16 billion in 2017. It also continues to lose money in 2018. The primary reason is the impairment of the assets due to the problems in area of generic drugs business. The segment is decreased continuously and also CEO stated that it should continue to deteriorate also in 2019 but it should return to moderate growth in 2020. The acquisition of Allergan business was quite heavy load for the company. The transaction in size of 40.50 billion USD (the deal was structured in the way, Allergan received 33.75 billion USD in cash and 6.75 billion USD in the shares of Teva). The acquisition of the Allergan generic business increased the debt of the company from bare 10 billion USD towards more than 35 billion USD in 2016, when the deal was done. The $33.75 billion in cash was financed through a combination of new equity, debt financing and cash on hand, so the debt was not increased totally by all his size. On the other side, the increase of the long-term debt was slightly more than 25 billion USD. The size of the debt load was huge, and the company thus recorded a huge amount of goodwill on its balance sheet. To operate smoothly, the business was expected grow steadily (under new debt load), however, the competition pressure mainly in generic business connected to Teva primary product COPAXONE (drug used to treat the multiple sclerosis). The revenue was primarily hit in the North America generic business segment. The declining outlook prospects and business revenues had severe consequences for the stock price of the company. It decreased to current level of mid fifteen USD are from level slightly above 70 USD reached in 2015.

Chart 1: Sales, Operating profit, Net income development

The decreased prospects of the generic business and heavy load of debt resulted to huge impairment losses. In addition to that the revenues of the company decreased, and huge competition had also negative impact on profit margins, so it had a negative impact to profitability that led to restructuring activities. The company however should stabilize its revenues in further years according to the CEO outlook and analysts’ estimates.

Chart 2: Sales Estimates – Yahoo finance

The revenues should be stabilized at the level of close to 17 billion USD in next years and the company should return to profitability.

Chart 3: EPS Estimates – Yahoo finance

The company earning per share should reach 2.4 USD per share in 2019 and 2.61 USD per share in 2020. The valuation based on forward P/E is thus pretty low. Considering current price per share at the level of 14.60 USD per share the 2019 P/E ratio is at the level of 6.08 and even lower in 2020. The industry median is at the level of 21.6. So, the company seems to be undervalued regarding the 2019 expected earnings. Regarding the P/B ratio at the level of 1.02, it is also undervalued as the industry level is 1.82 according to GuruFocus.com. Of course, the goodwill on its balance sheet remains still a huge portion, and there is some probability that it may be further impaired in next years. However, I think, the current levels are appealing and based on the fundamental measures, the company seems to be cheap. The fall in generic drug segment should be stabilized in next years and the company should return to profitability that may allure some investors, so as a result of that the stock price should normalize from the current levels.

The technical analysis shows that markets are currently near all time highs so there is a possibility of the reversal. The company stock price tended to be very sensitive on the market movements in the past. Due to that fact, I would wait some time for the correction on the market and try to buy the stock when the timing is better.

Chart 4: S&P 500 development Support - Resistances – Ninja trader software

The S&P 500 is near upper resistance level, so from this perspective I would wait slightly. In addition, there are some uncertainties connected to the further economic development and political situation in Europe.

Based on the technical analysis of the company share, I would try to wait for 2 indicators to confirm my timing. The company is trading heavily under 200 and 50 exponential moving averages. That indicates, the trend is currently downward sloping.

Chart 5: TEVA Short term chart EMA50 and EMA200 – Ninja trader software

The second indicator to use for the timing will be the longer chart using the supports for the company share price. The price currently crossed the level near 15 USD are, that is the resistance.

Chart 6: TEVA stock development Support - Resistances – Ninja trader software

If the price is under resistance level, it confirms the downward trend indicated via moving averages depicted above. It is also confirmed by the fact; the market is currently near its peak that may indicate potential correction. Due to this fact, the timing for the company stock is not good and I will try to wait for better timing. The timing to buy stock will be if the stock reaches the key resistance at the level close to 10 USD or the 200 moving averages is crossed that will confirm the upward trend. It may be possibly achieved if the whole stock market moves down due to the correction or some specific news at the level of the company. The 2 indicators are thus crucial at the level of the company for the timing of the BUY decision:

1. Support at the level of close to 10 USD

2. 200-day Exponential average

Bernanke, B. S. and Gertler, M. (2000). Monetary policy and asset price volatility. NBERWP n. 7559.

Finance.yahoo.com (2019, April 22). Monetary Aggregates. Retrieved from:

Finance.yahoo.com (2019, April 22). TEVA Analysts´ estimates. Retrieved from:

https://finance.yahoo.com/quote/teva/analysis/

Marketscreener.com (2019, April 22). TEVA Pharmaceutical Industries Limited (TEVA). Retrieved from:

https://www.marketscreener.com/TEVA-PHARMACEUTICAL-INDUS-56537293/?type_recherche=rapide&mots=teva

Marketwatch.com (2019, April 22). Teva stock drops 10% as generics turnaround looks uncertain. Retrieved from: