Summary
- A detailed review of the 5/30 Bank of America - Merrill Lynch downgrade, which sets a $9 target price for Teva.
- Implications of the changed valuation methodology.
- Surprisingly, what the analyst's data really imply is that Teva should outperform over the long term.
- This idea was discussed in more depth with members of my private investing community, Stability & Opportunity. Get started today »
As widely known, on 5/30, Bank of America - Merrill Lynch downgraded Teva Pharmaceutical (TEVA) to underperform with a target price of $9, causing yet another sell-off. The market evidently took notice of the drastic change of mind at BofA-ML as the bank's most recent price target for Teva had been among the highest out there: $24. So, a cut to $9 was quite drastic.
When I first saw the report, I couldn't understand how this was possible, as the analyst projects $3.5B of FCF for 2021, which is just two years from now, for a 35% FCF yield. How can a stock that, just two years from now, will make 35% of its market cap in FCF be downgraded?
Well, first of all, the bank doesn't have a great track record when it comes to predicting trading ranges for Teva: In the past, its guidance has been usually 100% useless or even damaging: When the stock stood at $50, its target was $74 and, although lowered over time in several steps in parallel to the bearish market action, remained always much higher than the actual stock price until the first crash to $9. At that point, the analyst suddenly lowered his target price to $11. However, soon afterwards, the bank became bullish again, as Teva rebounded to the $20 area and kept its target price above $20 until very recently. Yet, this is not where the stock went.
