Bloomberg News

Teva Favored Over Perrigo in Options Market: Israel Overnight

November 01, 2011

Nov. 1 (Bloomberg) -- Traders are making more bullish bets on Teva Pharmaceutical Industries Ltd. than on Perrigo Co., after shares of the two Israeli drugmakers diverged.

The ratio between put options to sell relative to call options to buy shares of Teva, the world’s largest maker of generic drugs, has held at about 0.65 since Oct. 27, the lowest since Aug. 1 and down from 1.01 in January. Traders are less bullish on Perrigo, which has a put-to-call ratio of 0.89. Perrigo shares increased 0.9 percent to 327 shekels, or the equivalent of $89.53 at 10:16 a.m. in Tel Aviv. Teva dropped 1.4 percent to 146.50 shekels, the equivalent of $40.11. New York- traded shares of Perrigo were at a 75-cent premium to Tel Aviv shares yesterday, while Teva traded at an 18-cent discount.

Perrigo, the U.S. pharmaceutical company that began trading in Tel Aviv after buying Israel’s Agis Industries Ltd., reached a record high of $101.01 on Oct. 24, buoyed by fast-growing demand for generic over-the-counter medications, then sank to close 7 percent lower for October after reporting results that disappointed investors. Teva posted its first monthly advance in five after this year’s tumble sparked by rising competition sent the stock to the lowest valuation among global drugmakers.

Perrigo “had been doing amazingly well and people think that this pace of growth cannot continue,” said Uriel Goren, head of the international clients desk at Tel Aviv-based DS Securities & Investments. “They think a lot of the good news is already reflected whereas Teva reflects a good opportunity and it’s undervalued.”

Stock Valuations

The Bloomberg Israel-US 25 Index of the largest Israeli companies traded in New York dropped 3.1 percent yesterday, outpacing declines in U.S. and Israeli benchmark measures, and surged 11 percent last month. Israel’s TA-25 Index fell for a third day, dropping 1.8 percent to the lowest since Oct. 11. The gauge ended the month with a 5.2 percent gain, the best performance since December 2010. Perrigo was the worst performing stock in the index last month and is the top gainer this year.

Perrigo, based in Allegan, Michigan, dropped 7 percent last month in New York while Teva of Petach Tikva, Israel, advanced 9.8 percent. Perrigo trades at 19 times 2012 estimated earnings after its shares added 0.4 percent to $90.28 in U.S. trading yesterday. Teva fetches 7.1 times estimated 2012 earnings and fell 3.5 percent to $40.85 yesterday.

The average estimated earnings multiple next year among companies on Israel’s benchmark TA-25 index is 9.89.

The Standard and Poor’s 500 Index slid 2.5 percent yesterday as global stocks declined on concern that European leaders will struggle to raise funds to contain the region’s sovereign debt crisis. The Stoxx Europe 600 Index retreated 2.8 percent today on top of yesterday’s 2.2 percent drop.

Currency Falls

The shekel fell 1.1 percent against the dollar to 3.6603, the best performance among 10 emerging markets in Europe, the Middle East and Africa tracked by Bloomberg. The currency strengthened 3.5 percent last month.

Israel’s Finance Ministry said yesterday economic growth will slow to about 4 percent next year from 4.8 percent this year as an expansion in exports eases. The Bank of Israel cut its growth forecast for next year to 3.2 percent on Sept. 22.

Teva is scheduled to report results for the third quarter tomorrow. The company may say earnings excluding certain items were $1.22 a share on $4.5 billion in sales, according to the median of estimates compiled by Bloomberg.

Analysts expect earnings of $1.65 a share and sales of $5.5 billion on average in the current quarter, and investors should watch guidance for that period, Natali Gotlieb, an analyst at I.B.I-Israel Brokerage & Investments Ltd., wrote in an Oct. 30 research note.

Buy Recommendation

“We assume that Teva will have no difficulty delivering third-quarter earnings per share of $1.22,” she wrote.

Gotlieb recommended investors buy the shares, “despite the fears that the company could miss its guidance.” The share price isn’t taking into account the potential for growth, she wrote.

Chris Schott, an analyst at J.P. Morgan, has an overweight rating on the shares because “even a modest uptick in positive news flow (which we expect) could move shares higher,” he wrote in an Oct. 26 note. The company will benefit in coming quarters from new generic drugs that treat schizophrenia, depression and high cholesterol.

Schott has a “neutral” rating on Perrigo and said a company target of 12 percent to 14 percent sales growth in the consumer healthcare business, which accounts for 61 percent of revenue, “appears lofty.”

Perrigo’s premium valuation “is not warranted,” Schott wrote in the note.

Mobile Workers

Teva’s price to 2012 earnings ratio is the lowest among 31 pharmaceutical companies worth at least $8 billion, according to data compiled by Bloomberg. Just two companies -- Allergan Inc. and Sun Pharmaceutical Industries Ltd. -- trade at higher valuations than Perrigo.

ClickSoftware Technologies Ltd. rose 0.9 percent to $9.90 in New York yesterday, extending its gains for the month to 27 percent. The Petach Tikva, Israel-based company, which counts PG&E Corp. and Best Buy Co. among its customers for software that helps schedule service calls, reported sales and earnings that exceeded some analysts’ estimates.

Sales were $23.2 million in the period ended Sept. 30 and earnings excluding certain items were 17 cents. Analysts expected adjusted earnings of 13 cents and sales of $22.58 million, the average of estimates compiled by Bloomberg.

The company expects revenue to grow 20 percent to 23 percent above 2010 levels, to $85 million to $87 million this year.

“The recent developments in mobility are creating a lot of opportunities for us,” Chief Executive Officer Moshe BenBassat said in an interview. “Almost every service company will equip its mobile workers with mobile equipment and we will be there to give them the software they need.”

Mellanox, Elbit

Israel, whose population of 7.7 million is similar to Switzerland’s, has about 60 companies listed on Nasdaq, the most of any country outside North America after China. It is also home to the largest number of start-up companies per capita in the world.

Israeli technology companies raised $522 million in capital during the third quarter of 2011, $47 million less than in the second quarter, according to the Israel Venture Capital-KPMG Quarterly Survey released Oct. 24.

Shares of Elbit Systems Ltd., Israel’s largest non- government defense contractor, rose 1.3 percent to $45.63 in New York, the highest in three months. The Haifa, Israel-based company received an $8.5 million contract to supply mortars to the Spanish Army over a 12-month period, according to a statement. The shares fell 1.3 percent in Tel Aviv to 159.50 shekels, the equivalent of $43.60, today. Mellanox Technologies Ltd., the adapter maker that’s part owned by Oracle Corp., fell 1.4 percent to $32.36 in U.S. trading. The Israeli shares gained 1 percent to 116.40 shekels, the equivalent of $31.82, today.

--With assistance from Shin Pei in New York. Editors: Brendan Walsh, Marie-France Han, Susan Lerner.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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