[BRIEFING.COM - Robert V. Green] Teva Pharmaceuticals (TEVA), a stock on the "Current Stocks" list of the Ahead of the Curve column, reports earnings tomorrow morning, Tuesday, February 13, before the open.
We expect Teva to meet current estimates for revenue, but beat earnings estimates, perhaps strongly. More importantly, though, we expect Teva to confirm the elements of our long term investment premise.
While a lot of attention will be paid to such recent matters as Sanofi-Aventis' legal loss regarding its patent on Lovenox and the news about a new CEO at Teva, neither of these events are very significant from the long term perspective. Most important will be Teva's statements on its outlook for 2007, compared to analysts' estimates for the year.
That guidance will be the most important driver of the stock in the short term, but it should be remembered that Teva has a history of very conservative guidance numbers.
Teva will report its 2006 fourth quarter (ended December 31, 2006) results before the open on Tuesday, February 13.
| TEVA Q4 2006 | Estimate Consensus | Range | Number of Analysts |
|---|---|---|---|
| Revenue, $M | $2,260.91 | $2,185.2 to $2,318.5 | 19 |
| EPS, $ | $0.58 | $0.53 to $0.62 | 21 |
Source for estimates: Reuters
We fully expect Teva to meet or beat these estimates with this quarter.
However, even if the company beats these estimates strongly, the more influential information will be how Teva's outlook for 2007 compares to current analyst estimates
The following table summarizes current consensus estimates for Teva's fiscal 2007 year.
| TEVA 2007 | Estimate Consensus | Range | Number of Analysts |
|---|---|---|---|
| Revenue, $M | $8,926.9 | $8,122.0 to $10,128.7 | 23 |
| EPS, $ | $2.15 | $1.97 to $2.38 | 25 |
Source for estimates: Reuters
The extreme range of these estimates, particularly the revenue range, means that any guidance given by the company will be the most important element of this quarter's report. If the guidance varies significantly from these estimates, particularly on the lower side, it will make the Q4 results forgotten instantly.
Nevertheless, the guidance will have the most impact on the short term valuation of the stock. We will be looking for confirmation of our long term investment premise for the company.
Teva Pharmaceutical is one of six stocks on the "Current Stock List" maintained by the Ahead of the Curve column. (For more details on what the Current Stock list means, please see the nine-part series of Ahead of the Curve columns from June of 2005. The last column, of 21-Jun-05, "The AOC Charter, Part IX: Current Stock List Portfolio Performance" contains links to all of the earlier columns in the series. )
As in previous coverage of quarterly earnings, it is worthwhile reviewing the individual elements of our long term investment premise. This long term premise was first detailed for Teva in May of 2003 (at a split-adjusted price of $22.72). The following list summarizes the principal elements of that premise, as detailed at the time.
In essence, we felt then (and still do) that Teva was priced primarily on the trends of its generic drug business, with the market failing to "price-in" the potential for pipeline drugs, if any of them were able to become revenue products.
Since that original investment premise, Teva has confirmed the elements of this premise in every quarterly report, although a new drug has yet to make it from the development pipeline to a revenue product.
The following table summarizes what we will be looking for in Teva's quarterly report in order to confirm our long term investment premise elements and argue for continued holding of the stock.
| TEVA Q4 2006 Metrics | Number To Beat | Estimate | Comment |
|---|---|---|---|
| Revenue, $M | $2,285 | $2,260.91 | The current estimate represents a sequential decline in revenue (last quarter was $2.285 billion). We would prefer to see continuing sequential rising revenue, but if a revenue decline is the only number that falls short of our premise predictions, we will not be concerned. Overall revenue growth is still strongly upward. |
| EPS, $ | $0.58 | $0.58 | If Teva meets the revenue estimates, and operating margin and gross margin numbers we hope to see are met, we think that Teva will actually beat current earnings estimates, perhaps strongly. |
| Operating margin | 28% | na | Last quarter's operating margin was a strong 31.7%, but the year ago period was just 26%. The trend has been rising and any margin number above 28% will confirm the continuing trend of operating margin expansion. We will also look at the trend of operating costs in absolute dollars to confirm the scalable nature of Teva's model. |
| Gross margin | 52% | na | Gross margin of 54% would be lower than last quarter's strong 55.2%, but the 4-quarter running average is just 50%. Any margin number well above that running average will confirm the trend of rising margins. |
On similar revenue last quarter, Teva earned $0.74 per share. Estimates for this quarter are only $0.58 per share. The implication from this is that analysts expect extreme margin contraction this quarter.
This assumption is driven by statements made by Teva management after last quarter's conference call that growing the "bottom-line" at current rates will be challenging. The implication was that Teva would have to have higher expenses as it grew bigger, making the growth of EPS occur at a slower rate.
However, we find it difficult to believe that margin expansion this quarter will be as sharp as most analysts are predicting.
An EPS of $0.58 per share on revenue of $2.261 billion is about 21% net margin. Last quarter's net margin was 26.5%. Net margin was 21% in the year ago period, but gross margins at that time were just 48%.
In order for TEVA to report $0.58 per share this quarter, while maintaining gross margins above 50%, as most expect, it means that somewhere between 500 and 700 basis points have to be "consumed" at the operating margin level.
This amounts to increasing operating expenses of more than $100 million. With total operating expenses last quarter of just $540 million, it seems impossible that they could increase by nearly 20% in a single quarter.
We therefore strongly believe that TEVA will beat earnings estimates by a wide margin in this quarter's report. The following table summarizes the range of possible EPS results for 06Q4, assuming various net margins. The center of the table represents the consensus estimates.
| TEVA EPS Sensitivity | Net Margin 19% | Net Margin 21.5% | Net Margin 23% |
|---|---|---|---|
| Revenue $2,148 (-5%) | $0.49 | $0.55 | $0.59 |
| Revenue $2,261 | $0.52 | $0.58 | $0.62 |
| Revenue $2,374 (+5%) | $0.54 | $0.61 | $0.66 |
Since we think that a net margin contraction to the 21.5% level is unlikely, we expect TEVA to report EPS between the $0.59 and $0.62 range.
Of course, if the 2007 guidance is perceived as negative, beating estimates as strongly as this will be overridden by concerns about the future.
We will have full coverage of Teva's results after it reports and after the Teva conference call on Tuesday, February 13. Our review will be from the perspective of our long term investment premise for the company. We certainly expect that, once again, a continued holding of the full TEVA position will be the conclusion.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com
Teva Pharmaceuticals (TEVA) : February 12, 2007 mid-day: $34.76 -0.24 (-0.7%)
Note: In accordance with Briefing.com's Trading Policy, the author has a personal position in Teva Pharmaceuticals.
The following tables provide a list of the prior related articles. In each table, the title of the article is a link that will display the archived article in a separate browser window.
| Date | Links | Main Argument |
|---|---|---|
| 23-Jun-06 | Teva: It's All Short-Term Volatility | "The focus has been primarily on events related to Zocor, the $4 billion-per-year cholesterol treatment drug. However, from the perspective of the long term investor, much of the price action should be viewed as short-term "overreactions." |
| 10-May-06 | Teva 06Q1 Earnings: Big Miss, But Other Factors Argue For Holding | "2006 Q1 results might appear to be weaken the long term investment premise, but given the complication of the IVAX acquisition, we are willing to wait until Q2 results to rejudge the merger's impact on margins. In addition, the unpriced potential of legal approval of the exclusivity period for Zocor argues for continued holding of the position. " |
| 28-Feb-06 | Teva 05Q4 Earnings: Yet Another Strong Confirmation | "This marks the fourth straight time that Teva's quarterly results have provided a strong confirmation of our long term premise elements. We recommend continued holding of the stock " |
| 06-Sep-05 | Teva Pharmaceutical's Tactics: Another Example | Examination of how Teva uses patent infringement lawsuits as tactical method to gain advantage for a generic drug. |
| 25-Jul-05 | TEVA, CREE, RNOW, VZ: Brief Updates | Acquisition of Ivax announced. |
| 06-Jun-05 | Teva: ABT Gets Injunction + EPS Hit = Not Important | Abbott wins injunction preventing Teva from launching generic version of Biaxin; analysis of impact on EPS. |
| 03-May-05 | Teva Pharmaceutical 05Q1 Results | Review of quarterly results against predictions of investment premise. |
| 28-Feb-05 | Investing In New Drug Potential: Watch Risk | How stocks with pricing already built into for future potential from new drugs create risk situations when the expected science does not occur. |
| 17-Feb-05 | Teva Pharmaceuticals 04Q4 Earnings Review Quick Take | Review of quarterly results against predictions of investment premise. |
| 22-Dec-04 | Teva Pharmaceutical Share Buyback | Analysis of announced share buyback program. |
| 04-Nov-04 | Teva 04Q3 Earnings Review: Confirmation of Premise | Review of quarterly results against predictions of investment premise. |
| 04-May-04 | TEVA 04 Q1 Earnings: Excellent Confirmation | Review of quarterly results against predictions of investment premise. |
| 23-Jul-03 | Ahead of the Curve: Healthcare - Teva, Part II | Relative valuation, drug pipeline. |
| 22-Jul-03 | Ahead of the Curve: Healthcare - Teva, Part I | Initial long term investment premise detailed. |
