Teva Postmortem – Is It The Walking Dead? – Seeking Alpha

Just one the day prior to the publication of Teva's (NYSE:TEVA) Q2 results we published an article here that already attempted to incorporate negative news to stress the financials and to evaluate how the company can handle such a scenario.

Reality went sour

Unfortunately, yesterday's Q2 figures turned sour. In a nutshell here are the main issues.

But the good news is...

I will have to disappoint you here. As value investors, we need to avoid talking the stock up to make us feel better - especially in a situation that is indeed a critical one. So let's look at this in a sober fashion:

In the last post we already set the financials under stress:

We are reducing TEVA to a firm with FCF power of $2.4bn - which is much lower than what their management has in their guidance for 2017:

Guidance on 'Cash from Operations': 4.4 - 4.6bn

So let's continue with our numbers as they are more conservative.

Source: Own Research

As you can see from the chart above this leads to a continuous reduction in debt. Putting the FCF (assuming constant $2.4bn) in context to this debt gives us the debt yield, which hence continues to improve over time.

We don't see it as unlikely that the firm breaches certain debt-to-EBITDA ratios this year due to short term failures. But ultimately this will not likely drive creditors to push management to take any sort of liquidation actions. Creditors are interested to have their coupons paid and to deal with a company that can easily refinance the debt when it comes due. The best way of doing this is to go soft with Teva.

Given we are convinced that debt will not a problem for the firm, we continue to stand by our method of valuing the firm on a FCF-multiple basis. The company now trades at circa 10x our stressed FCF figure of $2.4bn.

Conclusion

In light of the above, we see the markets move as an overreaction. Management has decided to take decisive action. From our margin-of-safety lens, we see the firm on the floor, brutally beaten. But, it has sufficient ingenuity, resources and will power to recover. The firm will be around in years to come. We are bullish on TEVA for anyone with a long term view.

Disclosure: I am/we are long TEVA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Teva Postmortem - Is It The Walking Dead? - Seeking Alpha

Reviewed and Recommended by Erik Baquero