Specials Situations: Dumpster Fire Trading
August 7, 2017
DISCUSSION & ANALYSIS
Apparently I cannot find a dumpster fire too hot to touch. Ugh.
But TEVA is down over 40% in five days on absolutely enormous volume – something like 20% of outstanding shares – the debt has held above its 2017 YTD lows, the 5-year CDS quote is under 200 bps, and the sentiment around the stock is predictably hideous. I can’t pass it up here for at least a trade.
“Stress” must be bought.
Bloomberg’s “Chaikin Money Flow” highlights the extent of the selling:
Perhaps it is Allergan (NYSE: AGN) puking up its 100 million share stake. Hard to say. But someone wants out, clearly.
While TEVA’s stock price is behaving as if the Company is about to go “flippers up”, the credit market is borderline sanguine, which is the crux of my short-term (potentially medium-term) trade thesis. TEVA’s 2026 and 2046 debt, while certainly headed in the wrong direction in the short-term, remain above 2017 YTD lows, and currently yield 4.3% and 5.1% to maturity.
And the 5-year CDS – again, while headed in the wrong direction – is below 200 bps (compare to VRX’s 600+…).
This credit market profile is hardly the sign oncoming earnings power stress.
Lots of moving parts with Copaxone staring down generics risk. But conservatively adjusted for my estimated Copaxone fair EV of $4.6 billion and a Copaxone EBT margin assumption of 90%, TEVA is trading at approximately 11.1x 2018E EBITDA with 6.8x gross leverage. Using the same Copaxone adjustments to earnings, but not to the market cap or interest expense, on a P/E basis TEVA trades for approximately 8.6x 2018E EPS (25% tax rate).
The most immediate catalyst is selling volume simply drying up. But asset sales, a new CEO, and activist/PE involvement could all “surprise” the market in the coming days and weeks.