This Just In: More Upgrades and Downgrades
At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Deutsche digs Teva
My, how time flies. Was it only last month that we were sitting here, discussing Piper Jaffray's epic dis of Teva Pharmaceutical (NAS: TEVA) ? Yet here we are again, and this time we've got better news for shareholders of the Israeli pharmaceuticals magnate. Namely, a reinitiation of coverage on Teva by Deutsche Bank, which thinks you should buy the stock. Curiously, both ratings stem from the same big-picture trend in the world of Big Pharma: generic drugs and how they're going to bring brand-name drugmakers like Pfizer (NYS: PFE) and Merck (NYS: MRK) -- and now Teva as well -- to their knees.
As you probably recall, Piper's objection to Teva stemmed from two fears. First, that the company's Copaxone multiple sclerosis drug was threatened by a new drug candidate (BG-12) from Biogen Idec (NAS: BIIB) . Second, a more immediate threat came from generic versions of Copaxone that Novartis (NYS: NVS) and Mylan (NYS: MYL) wish to sell.
A modest proposal
But if you ask Deutsche Bank, the rise of generic drugs relative to their brand-name counterparts is the furthest thing from a bad thing for Teva, which Deutsche argues is now "the world's largest generic drug company." Deutsche praises the company for demonstrating superior operational execution and is particularly impressed with Teva's "successful track record of p-IV challenges." In short, if anyone knows how to deal with a generic threat, it's probably Teva -- whose claim to fame is its skill at finding and poking holes in the weak points of other companies' patent protections.
According to Deutsche, the real risk at Teva is that investors who in the past considered it a premier growth stock may now begin wondering if Teva is transitioning into a value story. But even here, the analyst sees an opportunity to profit. Teva today, you see, is a company that earns about $3 billion per year in GAAP profits, while generating free cash flow of only $2.8 billion. At today's stock price, that works out to about a 12 P/E ratio, and a bit higher valuation on price-to-free cash flow -- no great bargain if all Teva can manage to do is grow 10% per year going forward, as most analysts expect.
But Deutsche argues that Teva is destined to do much better than that. The analyst sees Teva potentially generating as much as $4 billion in free cash flow annually over each of the next four years. It may not get there, but if it does, this would make for better than a 40% improvement in annual free cash flow from today's levels.
Is Deutsche right? Perhaps. I admit that I was pretty taken with Teva the last time I wrote about it. But that was before Teva reported earnings that showed a steep fall-off in free cash generation (from year-ago levels). While one quarter's performance does not a sell thesis make, I personally don't like to see Teva trending in the direction opposite to the one Deutsche is staking its buy thesis on.
Based on the company's most recent numbers, I'm forced to revise my optimistic opinion on the stock. With cash flow falling, and capex rising, I now see Teva as only fairly priced for its future prospects. While I'm not yet ready to "sell" the stock, and intend to give it some time to prove Deutsche right (or wrong) on its bullish prognosis, I do not encourage investors to follow my lead.
Investing in drug stocks doesn't have to be a high-reward, high-risk game. There are plenty of ways to get rich from health care... without the risk. Find out how in the Fool's new -- and free! -- report on13 High-Yielding Stocks to Buy Today.
At the time this article was published Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 308 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Teva Pharmaceutical Industries.Motley Fool newsletter serviceshave recommended buying shares of Pfizer, Teva Pharmaceutical Industries, and Novartis.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.