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Dissecting the Numbers for Teva Pharmaceutical Industries Limited (TEVA) and Rowan Companies plc (RDC)

Teva Pharmaceutical Industries Limited (NYSE:TEVA) shares are down more than -4.70% this year and recently increased 0.06% or $0.01 to settle at $18.06. Rowan Companies plc (NYSE:RDC), on the other hand, is down -4.60% year to date as of 04/16/2018. It currently trades at $14.94 and has returned 16.08% during the past week.

Teva Pharmaceutical Industries Limited (NYSE:TEVA) and Rowan Companies plc (NYSE:RDC) are the two most active stocks in the Drug Manufacturers – Other industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect TEVA to grow earnings at a -5.45% annual rate over the next 5 years. Comparatively, RDC is expected to grow at a -4.40% annual rate. All else equal, RDC’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. EBITDA margin of 51.35% for Rowan Companies plc (RDC). TEVA’s ROI is -36.00% while RDC has a ROI of 2.70%. The interpretation is that RDC’s business generates a higher return on investment than TEVA’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. TEVA’s free cash flow (“FCF”) per share for the trailing twelve months was +2.41. Comparatively, RDC’s free cash flow per share was +0.32. On a percent-of-sales basis, TEVA’s free cash flow was 10.95% while RDC converted 3.15% of its revenues into cash flow. This means that, for a given level of sales, TEVA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. TEVA has a current ratio of 0.90 compared to 6.10 for RDC. This means that RDC can more easily cover its most immediate liabilities over the next twelve months. TEVA’s debt-to-equity ratio is 2.37 versus a D/E of 0.47 for RDC. TEVA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TEVA trades at a forward P/E of 6.50, a P/B of 1.34, and a P/S of 0.83, compared to a P/B of 0.35, and a P/S of 1.47 for RDC. TEVA is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. TEVA is currently priced at a -6.38% to its one-year price target of 19.29. Comparatively, RDC is 3.82% relative to its price target of 14.39. This suggests that TEVA is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. TEVA has a beta of 0.68 and RDC’s beta is 1.82. TEVA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. TEVA has a short ratio of 4.24 compared to a short interest of 6.60 for RDC. This implies that the market is currently less bearish on the outlook for TEVA.

Summary

Rowan Companies plc (NYSE:RDC) beats Teva Pharmaceutical Industries Limited (NYSE:TEVA) on a total of 8 of the 14 factors compared between the two stocks. RDC has higher cash flow per share, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, RDC is the cheaper of the two stocks on an earnings and book value, Finally, HON has better sentiment signals based on short interest.

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