The Motley Fool: Teva delivers generic profits
The Motley Fool Take
If you’re looking for a growing stock that offers dividend income, take a closer look at Teva Pharmaceutical Industries (NYSE: TEVA). Teva is a hybrid drug developer, generating substantial revenue from both branded drugs and generic products.
Branded drugs provide the juiciest profit margins, but they have finite periods of patent exclusivity. Once a drug loses its patent protection, generic makers tend to start offering less expensive substitutes. Conversely, generic drugs feature lower profit margins, but there’s a strong stream of opportunities, as branded drugs keep coming off patent. Additionally, generic drug prescriptions are growing in the United States.
More important, Teva is in the process of acquiring Allergan’s generic drug business, which sports more than 1,000 approved products, for more than $40 billion. Following completion of this deal, Teva will cement its spot as the world’s No. 1 generic drug developer and will have more power to negotiate with public and private payers. Even if Teva’s profit margins take a hit due to increased generic sales, the company may well make up the difference in sheer volume.
Recently down about 18 percent year-to-date and expected to grow its full-year earnings per share by a high single-digit percentage annually through 2020, Teva Pharmaceutical is well worth considering. It even offers patient believers a dividend recently yielding 2.5 percent. (The Motley Fool has recommended Teva.)
Ask the Fool
Q: How can you figure out a stock’s fair value? - T.N., Butler, Pennsylvania
A: A stock’s fair, intrinsic value is not necessarily the same as its current price. Determining it isn’t easy, and many skilled stock analysts will arrive at different numbers. They often employ “discounted cash flow” analysis, estimating future free cash flows and assigning them present values based on chosen discount rates. That may sound precise, but it’s still based on guesses.
Individual investors often employ simpler approaches to valuation, such as comparing a company’s price-to-earnings (P/E) ratio to its growth rate. If the growth rate is much higher, the stock may be undervalued. You might alternatively compare the company’s current P/E ratio with its historical P/E ratio range or average P/E, which you can find at sites such as Morningstar.com. If the stock’s five-year average P/E ratio is 17 and it’s at 24 now, there’s a good chance it’s overvalued.
Remember, though, that P/E ratios will vary by industry. Automakers, for example, typically sport low ones, while less-capital-intensive businesses such as software companies often have higher P/Es.
Don’t rely on any one method alone. Gather lots of information to understand portfolio candidates better. To see which companies our analysts think are undervalued, try our Motley Fool Inside Value newsletter for free, at fool.com/shop/newsletters.
Q: How can I learn about corporate financial mischief? - J.F., Fort Wayne, Indiana
A: The footnoted.com website reports on surprising information buried in financial reports. You might also read “What’s Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio” by John Del Vecchio and Tom Jacobs (McGraw-Hill, $34) or “Financial Shenanigans” by Howard Schilit and Jeremy Perler (McGraw-Hill, $38).
My Dumbest Investment
My dumbest investment? I bought stock in Apple way back in 1983 for around $8 per share - which was actually considered a high point by some, as the stock had recently surged. I sold it after a few years to pay off all my student loan debts. What a regrettable move! - S.J.S., online
The Fool responds: You obviously would have made a massive profit if you’d hung on, but that’s only clear with hindsight. Remember that Apple went through some tough years, written off by many. Its market share was long puny compared to that of other PC makers. It had lots of flops, too, such as the before-its-time Newton personal digital assistant, the Macintosh TV and the Apple Lisa, the first personal computer to offer a mouse and interactive graphics, but with a price tag of about $10,000 - nearly $24,000 in today’s dollars!
Few people suspected that Apple would get past management shakeups and other problems, start creating and/or dominating whole new product categories, and become one of the most valuable companies on Earth.
Think, too, of your debt. Hanging on to your stock would have given you possible gains, but possible losses, too, while paying off debt - especially high-interest debt - can free you to save and invest more effectively. You reaped a gain by not having to pay a lot of interest on that debt.