Here's How Teva Pharmaceutical May Be Failing You

Margins matter. The more Teva Pharmaceutical (Nasdaq: TEVA  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Teva Pharmaceutical's competitive position could be.

Here's the current margin snapshot for Teva Pharmaceutical and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Teva Pharmaceutical 56.5% 26.8% 19%
 Abbott Laboratories (NYSE: ABT  ) 58.4% 21.2% 13.9%
 Pfizer (NYSE: PFE  ) 78.1% 27.7% 9.2%
 Elan (NYSE: ELN  ) 50.3% 7.1% (27.3%)
       

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Teva Pharmaceutical has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the latest fiscal year, and the latest fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Teva Pharmaceutical over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 55.2% and averaged 51.8%. Operating margin peaked at 26.1% and averaged 25%. Net margin peaked at 20.4% and averaged 13.4%.
  • TTM gross margin is 56.5%, 470 basis points better than the five-year average. TTM operating margin is 26.8%, 180 basis points better than the five-year average. TTM net margin is 19%, 560 basis points better than the five-year average.

With recent TTM margins all exceeding historical averages, Teva Pharmaceutical looks like it is doing fine.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at Teva Pharmaceutical? Let us know in the comments below.

Seth Jayson owned shares of the following at the time of publication: Elan. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Pfizer is a Motley Fool Inside Value pick. Elan is a Motley Fool Rule Breakers selection. The Fool owns shares of Teva Pharmaceutical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2010, at 10:58 PM, steven107 wrote:

    Title: "Here's How Teva Pharmaceutical May Be Failing You"

    Conclusion: With recent TTM margins all exceeding historical averages, Teva Pharmaceutical looks like it is doing fine.

    I never did like the Fool's use of fake and intentionally misleading article titles whose sole purpose is to lead a person into reading the articles and losing valuable time after having read the article and then realizing that they have been 'fool'ed.

    P.S. you have a chart comparing a Specialty Pharma who is primarily a Generics Company which is a low margins business, ,with 3 other pharmaceuticals who have New Chemical Entity - Brand Drugs, which is a high margins business; and then are comparing their margins as if they were comparative.

  • Report this Comment On November 30, 2010, at 12:28 AM, rfaramir wrote:

    Do marketers (liars) name the articles for you writers? The article is mostly fine (except for steven's P.S.), but the name is opposite of the conclusion.

  • Report this Comment On December 07, 2010, at 10:50 AM, GirlScoutDad wrote:

    I thought the purpose of the Fool was to "educate and amuse", not to "irritate and confuse."

    I agree with the comments: it's disruptive to read an article only to find out at the end that the conclusion is the opposite of the article's title. Because I'm not a financial professional, I had to re-read the article to make sure I wasn't missing something.

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