Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Good Stocks

Is Buffett Right about Teva?

One of Warren Buffett’s oddest stock holdings is the Israeli/American drug maker Teva Pharmaceutical Industries Ltd (NYSE: TEVA).

Teva is cheap; trading at $13.30 a share on 20 February 2020. However, Teva’s revenue growth, and gross profit are shrinking.

Teva’s quarterly gross profit fell from $1.977 billion on 30 September 2018 to $1.829 billion a year later. Between September 2018 and September 2019, Teva suffered four quarters of revenue growth shrinkage.

For example, Teva’s revenue growth shrank by 5.85% in the quarter ending on 30 September 2019, Stockrow estimates. Likewise, Teva’s revenue growth shrank by 7.74% in the previous quarter.

Consequently, Teva’s quarterly revenues fell from $4.529 billion on 30 September 2018 to $4.264 billion on 30 September 2019. Thus, Teva’s business is shrinking.

How Much Teva does Buffett own?

Berkshire Hathaway (NYSE: BRK.B) owned 43.249 million shares of Teva (NYSE: TEVA) in 3rd Quarter 2019, Kiplinger estimates. Therefore, Teva made up 0.14% of Berkshire’s portfolio in Third Quarter 2019.

I think Buffett owns Teva because of its business. To explain, Teva’s main business is the manufacture and marketing of generic drugs. There is a huge market for those drugs because taxpayer-financed single-payer health insurance systems pay for generic drugs.

In fact, Teva claims to manufacture one out of six prescriptions issued in the United Kingdom and Canada. Moreover, Teva estimates generic drugs account for 90% of the prescription medicines sold in the United States and 78% of the prescriptions in Germany.

In contrast, generics account for 22% of the prescription spending in the United States and 30% of the prescription spending in Germany, Teva claims. Single-payer health insurance systems finance prescription drugs because they are cheaper.

Teva supplies generic medicines with 70 manufacturing sites worldwide. Additionally, Teva claims it sells prescriptions to 200 million in 60 countries.  

How Teva could Profit from Bernie Sanders and Single-Payer

Teva’s market could grow soon because of popular demands for single-payer health insurance in the United States.

All the candidates in the current Democratic Presidential Primary support some form of single-payer health insurance. The leading candidate, U.S. Senator Bernie Sanders (I-Vermont), favors a full Canadian style government health insurance system or Medicare for All. In Canada, the government is the only health-insurance provider, and acts as everybody’s health insurance company.

All the other candidates favor the “public option.” The public option is single-payer lite in which government-issued health insurance competes with private insurance in the open market.

I think the public option will become single-payer fast because most people will choose the public option. To explain, I think the public option will be so cheap and comprehensive no private insurer could compete with it. Under the public option, the government will become Teva’s major customer.

In the 13 February 2020 Morning Consult poll Sanders received of the probable Democratic presidential primary vote. Public option proponents Joe Biden (D-Delaware), Michael Bloomberg, Pete Buttigieg, and U.S. Senator Elizabeth Warren (D-Massachusetts), received 29%, 18%, 11%, and 10%.

Is Teva Making Money?

Teva reported an operating income of $95 million, and a negative net income of -$308 million on 30 September 2019.

Additionally, Teva had an operating cash flow of $325 million, and a negative ending cash flow of -$924 million on 30 September 2019. Thus, Teva’s business is losing some cash.

As a result, Teva had $1.241 billion in cash and short-term investments on 30 September 2019. Therefore, Teva is not a cash-rich company, so it does not meet another of Buffett’s value criteria.

However, Teva has a lot of value because it had Total Assets of $57.246 billion on 30 September 2019. Those assets were down from $65.061 billion on 30 September 2018. Thus, Teva lost value in the year between September 2018 and September 2019.

Does Teva pay a Dividend?

Teva (NYSE: TEVA) is a poor stock for ordinary people because it currently pays no dividend.

Teva last paid a dividend in November 2017, reports. On 27 November 2017, Teva paid a 7.225₵ dividend.

I think the lack of a dividend gives Teva no margin of safety, which makes the stock too unstable for average people to own. However, Teva is a good low-cost stock for people; such as Buffett, who have extra money.

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