A turnaround story of the year?

I’m pretty sure no one is interested in it and many of you may even laugh at me for even talking about this company. Yes, it is one of most hated stocks in the past two years. Quarter after quarter, it has disappointed investors and it has been punished accordingly by losing 85% of its values from its peak to the recent low ($70 to $11). I’m talking about the world biggest generic pharma company, TEVA. So why I’m interested in it now? Well, as a contrarian, I’m naturally interested in something no one likes and would like to find some “gems” from the seemingly “garbage”.  I think TEVA may be one of such companies that may surprise people as a great turnaround story of the year for 2018.

 

After glory years of growth for decades becoming the largest generic drug company in the world, TEVA has suddenly started to face really challenging environment for their business. With growing difficulty and shortage of budget facing all the governments around the world in their finance, more and more countries have started to find ways to cut various government fundings  and healthcare is more of the most expensive sectors and therefor e with a great potential for government savings. Due to their cheap prices, governments are the biggest buyers of generic drugs and they all want to cut prices significantly from the current levels. This is especially true in EU and US, the two biggest drug markets in the globe. TEVA has apparently not well prepared for the changes coming pretty quickly in the past few years and their sales have been declining continuously quarter after quarter.  One big mistake the management made last year was to borrow huge money to buy Allergan's global generic drugs business for $40.5 billion. So the biggest challenge facing them is the huge debt load of $35 billion. With a reducing revenue but increasing debt interest to pay, investors are becoming really nervous now whether TEVA can survive the debt crisis. This is a real concern but I think it will survive. Right now I think it may be the best time to buy TEVA for a very likely successful turnaround in the next 1-2 years. For two reasons: TEVA is still a profitable company and with a PE just around 6, it is extremely cheap by any means. This may start to attract value investors to come in, even potential acquirers for a takeover (of course pure speculation). More importantly, TEVA has just got a new CEO and the new management has started to do something really drastic to find funding to pay down their debt. TEVA just announced that it will cut 14 000 jobs, or around 25 percent of its global workforce, over the next two years as part of a restructuring plan and will eliminate all its dividends.  It will close most of its domestic manufacturing activities and reduce the size of its remaining operations in the country.  Under the plan, production will be transferred to China or India. It has already managed to sell other assets starting last year for their top priority of paying down the debt. It is definitely a very painful process and period for the company but it is essential for their survival.  With the company becoming more lean to focus on their core business and substantially reduced debt load, it may become a real interesting target for acquisition. But from the investment perspective, you don’t need to bet on an M&A. The market has a forward looking ability and its share price may go up substantially from the current very depressing level if the market foresees its future success of the turnaround.  The stock jumped 14% after the restructuring announcement and it has already come up a lot from its low of $11, trading hands around $18. Technically it appears to form an inverse H&S, often a bullish sign for reversal.  Even if it double from here, it is still 50% below its peak. I feel safe to buy TEVA now when hardly anyone is interested in it. To me a good turnaround story may be just starting now.