Gambling On TEVA, Proctor & Gamble Places A Bet (TEVA) (PG)

Looking to see what is working in the investment markets today and has a good probability of working in the future is a daunting task. No one really knows where the markets are going with true certainty, dear reader, the best anyone can do is make an educated guess. In order to guess one must have a good business sense and then take in all the available information and formulate an opinion upon which to act. The problem with the opinion making process is that the rules of old don't necessarily work in the current paradigm and may have permanently changed. Even with a change in paradigm there are certain things that remain constant throughout history; basic human needs, human nature, and the life cycle. So while we as a nation and world are in unchartered territory from both an economic and geopolitical perspective there are still investible themes to be capitalized upon. I am not a day trader or short term trader by nature as I prefer to identify an investment opportunity that will play out over a period of time instead of looking to turn a quick buck and run with the “hot” money crowd. Given my bias for investing and against raw speculation I am always on the lookout for companies that fit the mold of an investment which can trend for longer periods of time. In the current environment I am trying to identify companies and trends that can profit and grow based upon factors which have the greatest resistance to market drivers. One theme that has been the subject of tremendous debate and argument is healthcare and the passage of Obamacare. Whether you feel Obamacare is a good thing or bad is irrelevant, instead it needs to be examined and looked at for investment opportunity. Obamacare appeared on the scene under the guise of providing universal coverage but has morphed into a healthcare cost containment program. Now we can debate all day if Obamacare will contain or drive costs, which if my home state of Massachusetts is any example it will escalate costs far more than imaginable, but I would rather focus on the investment angle. If as is being widely touted the driver for Obamacare is cost then there are a few factors that need to be taken in to consideration. First, by the very nature of the idea we as a country are going to expand the pool of people receiving health services putting strain on an already burdened medical system. Second, the baby boom generation, those individuals born between 1945 and 1964, are approaching retirement age when healthcare demands tend to rise. Third, the increase in demand and limited healthcare dollars will drive further cost containment both through rationing and looking for price reductions. Given the factors listed above the trend that is highly likely to benefit is the generic drug industry. Ironically, as the trend toward generics gains momentum there is the possibility that the development of new drugs will continue to slow as companies may not be able to recoup enough of the development dollars before the new drug would go generic, but that is a debate for a different post. My favorite play on the healthcare theme and trend is an Israeli company in the generic drug space called TEVA PharmaceuticalsTEVA. TEVA trades with a PE of 13.4 vs the industry average of 42.4 and TEVA's price to sales ratio is at 2.86 vs. the industry at 18.45. Furthermore, TEVA sports a Price to book of 2.01 which less than half of the industry average. Additionally, TEVA's PEG (Price to earnings growth) ratio is .97 at current levels vs. the industry which is 3.0. A PEG of 2.0 is considered undervalued relative to expected earnings growth. Moreover, TEVA's quarterly earnings growth, year over year, increased at a rate of 102% .The bottom line for TEVA is bolstered by the fact that it has gross margins of 56%, operating margins at 24% and net margins of 20%. TEVA. TEVA has about $6.8 Billion in debt with a debt to equity of 33%. The current ratio stands at 1.24 so TEVA has no problems servicing its debt and with strong margins I don't see this as an issue although I would be happier with a stronger ratio here. While I would not call TEVA an undervalued play it is to me well valued and appears to be in a better condition than most of its competitors from a valuation and financial perspective. TEVA does provide a dividend of 1.77% as of this writing and has boosted it 25% over the last 3 yrs so you get paid to wait as well. The increasing dividend to me is an additional confirmation of management's faith in the company and its growth since unlike earnings dividends cannot be manipulated; you either have the funds or not. The Payout ratio on the dividend is 18% so it is not as if management is paying out all the profits to shareholders leaving nothing for business reinvestment. In the meantime it was announced today that Proctor & Gamble PG has entered into a joint venture with TEVA to market over the counter drugs. TEVA will retain a 49% ownership stake and P&G will have 51%. I actually think that this joint venture will be a boon to both companies. P&G will benefit by bringing on line new drugs and other medical related supplies that TEVA currently manufactures helping to add some growth to an old-line company. Additionally, P&G will benefit from opening new markets that TEVA currently has a foothold in and vice versa. The synergy of the two operations should allow for more medicines to be distributed around the world and higher volumes should give the entity some advantage through economies of scale. While I believe that P&G will benefit from this relationship the real growth in my opinion is going to be with TEVA ince it is about 4 times less in market cap. TEVA was already in a good position but it had a misstep last earnings reporting period and the stock was severely punished. The announced deal gives TEVA an edge in the marketplace over rivals like Watson Pharmaceuticals WPI because this deal in essence gives the “generic” TEVA a brand name to market under. The goodwill out of this deal is worth it from TEVA's perspective. Think about it if you are not an investor or involved in the medical arena you probably have never heard of TEVA and all the generics they make. P&G has tremendous brand recognition and a highly developed distribution and logistics architecture which will now benefit TEVA while bolstering the stodgy P&G as well. This is a stock on my watch list due to healthcare cost factors, the aging demographic of the baby boomers worldwide and now the P&G deal. I do feel TEVA is attractively valued; however, it appears to be bottoming out at the time of this publication. Even though TEVA is in a sector with great long term fundamentals and sports a Beta of .2(meaning it does not really correlate with the S &P 500 performance); I feel that the stock still needs more time to repair the damage to its chart. The news of the joint venture has caused TEVA to jump over 2.5% today and hopefully this will help put a floor in on the stock. The chart indicators like RSI are screaming to the upside today and while not over bought it is well on its way there. Investors should keep an eye on TEVA and could nibble here but look to average in rather than jump on this news. Yes the deal is good and TEVA should climb but in this market with all stocks I am like Missouri meaning “show me”. As I said before I think the chart needs work. Today's rally in TEVA is good as it has broken the down trend that was in place since the earnings snafu, but gaps like this can be dangerous. What you want to see is a consolidation of today's gains and building of a base to repair the damage and set the stage for a blast to the upside. Many times especially in unstable markets like we have these days news events only give a temporary pop in the issue only to have it drop back down for consolidation. Many technicians will be watching the 50 day moving average as that is currently crossing down through the 200 day which is also in a down trend. Both of these averages will act as resistance going forward until they don't. At some point when the 50 day moving average turns up many of the technical funds will begin to purchase and the new uptrend will start in earnest. I like TEVA here between $49 and $50 and if it consolidates and runs up I would wait for a pullback to add to my position, however, you are going to have to give TEVA some time here. Disclosure: I do not currently have a position in TEVA, but I am actively monitoring the stock for a good entry point. I post this column on Thursdays here at Benzinga although I do have my own blog (monetaadvisors.com) where I cover stocks, commodities, precious metals, currencies, markets, government and interesting general observations that may not get play on Wall Street as well as subjects that interest me and hopefully you too. I also have a Twitter Feed @monetaadvisors if you are interested. I am a Series 65 Investment Advisor Representative and have recently started my own investment advisory called Moneta Advisors, LLC, based in the Boston area. I have been through a series of careers from which I have learned many useful things along the way. In my past I have been a stockbroker, computer programmer, Sr. computer consultant, and ran a manufacturing company; all the while I remained a private investor.

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