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This Former High Flier Could Be Set to Soar Again

This Former High Flier Could Be Set to Soar Again


Source: TevaPharm.com

By 2015, long term investors in Teva Pharmaceutical Industries (NYSE: TEVA) were sitting on gains of more than 2,000%. But, that was about to change.

TEVA monthly chart

TEVA had been selling drugs to treat HIV for years and then came out with a drug that cured hepatitis C. It meant patients would no longer be faced with severe complications and potentially needing transplant surgery. The stock jumped on prospects for the drug.

But, there were soon competitors to deal with and the problem for investors looking ahead was that the drug cured patients. That meant the company lost the repeat business drug companies thrive on.

A Possible Turnaround

Now, Barron’s reported, “Teva Pharmaceutical Industries (TEVA) is climbing after reporting third-quarter earnings.

Where we were: Teva has climbed more than 14% since the start of the year, outpacing the SPDR S&P Pharmaceuticals ETF’s (XPH) 0.5% decline and the Health Care Select Sector SPDR ETF’s (XLV) 8% gain.

Where we’re headed: A better-than-expected quarterly profit and upbeat guidance is boosting the stock Thursday.

TEVA daily chart

Digger deeper, analysts note, “big pharmaceutical stocks are due for a run-up, but the industry hasn’t participated much in the health-care rally, hurt in part by concerns over drug prices, slower growth rates, and little in the way of strategic uses of corporate tax savings.

Teva has been an exception to that rule, with 2018 gains ahead of the market and the health-care sector as a whole, helped by new drug approvals and confidence in CEO Kåre Schultz’s execution of the company’s turnaround.”

A better-than-expected third-quarter profit and increased guidance lent more credence to that thesis.

An Earnings Beat Attracts Buyers

Teva said it earned 68 cents a share on revenue of $4.53 billion, while analysts were looking for earnings of 54 cents on revenue of $4.54 billion.

The Israeli company attributed the slight top-line miss to generic competition for its multiple-sclerosis drug Copaxone, lower prices in its U.S. generics business, and divestments.

For the full year, it raised its forecast. Teva now expects to earn between $2.80 and $2.90 a share, up from $2.55 to $2.80, on revenue of $18.6 billion to $19 billion, up from $18.5 billion to $19 billion. Consensus calls for earnings of $2.78 on revenue of $18.85 billion.

The CEO spoke with Barron’s following the company’s report, and says there are three main highlights from the quarter.

First, the company’s restructuring plan is ahead of schedule. Schultz says that Teva is seeing “good results on the cost side, a prerequisite for the whole business plan in the coming year,” as the company has reduced spending and head count.

Second, Teva has “good indicators of future growth” thanks to its portfolio of products, including movement-disorder drug Austedo (launched last year, with expected sales of more than $200 million this year), and the recently approved migraine treatment Ajovy, which is already seeing a “strong uptake in prescriptions,” he says.

Finally, the CEO says that the “collapse of the U.S. generics business in terms of value over the past five years has come to a stop.” Teva has been able to “stabilize revenue of the U.S. generics business” following discussions with customers, providing a “stronger outlook” for the business.

In regard to the raised guidance, Schultz attributed the brighter outlook to a “nice performance for Copaxone,” with volumes holding up despite competition, and Austedo’s sales. He also expects that ongoing cost reductions and increased free cash flow—a key component of Teva’s plan to reduce its leverage—that marked the third quarter will continue in the fourth.

This should all be bullish for the stock.

Trading the Trend

When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.

Among those strategies is a bull put spread could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.

bull put spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for TEVA

For TEVA, a bull put spread could be opened with the November 16 put options. This trade can be opened by selling the November 16 $24 put option for about $1.63 and buying the November 16 $20 put for about $0.15.

This trade would result in a credit of $1.48, or $148 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $4 ($24 – $20). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $252 ($400 – $148).

The potential gain is about 58% of the amount of capital risked. This trade will be for about one week and the annualized rate of return provides a significant gain.

The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.