NAIC Stock to Studyfor April 2005Teva Pharmaceutical Industries Ltd

Presented by:

Ty Hughes

NAIC DC Chapter

April 12, 2005

What is NAIC?

National Association of Investors Corporation

NAIC teaches individuals how to become successful strategic long-term investors

NAIC investors use fundamental analysis to study common stocks

Websites:

www.better-investing.org

www.naicdc.org

NAIC Principles

Invest a fixed amount regularly for the long term

Reinvest all of your earnings

Invest only in good quality growth companies

Diversify (25% large companies, 25% small companies, and the rest in between – divided among a variety of industries)

Teva Pharmaceutical Industries

One of the world's largest generic drug companies and has the leading position in the U.S. generic market.

Teva has successfully utilized its production and research capabilities to establish a global pharmaceutical operation focused on supplying the growing demand for generic drugs and on opportunities for proprietary branded products for specific niche categories, with its leading branded drug being Copaxone(R)for multiple sclerosis.

Teva's active pharmaceutical ingredients ("API") business provides both significant revenues and profits from sales to third party manufacturers and strategic benefits to Teva's own pharmaceutical production through its timely delivery of significant raw materials.

During 2004, 64% of its sales in North America, 26% in Europe and 10% in the rest of the world, predominantly in Israel.

American Depositary Receipts

American Depositary Receipts were created in 1927 to aid US investor who wished to purchase shares of non-US corporations. Since that time, ADRs have grown into a popular and flexible structure which enables issuers worldwide to access investor outside their home markets.

An ADR is a negotiable certificate evidencing ownership of shares in a foreign corporation. Each ADR denotes depositary shares which represent a specific number of the underlying shares remaining on deposit in the issuer's home market.

American Depositary Receipts

An American Depositary Receipt (ADR) is a share of stock of an investment in shares of a non-US corporation. The shares of the non-US corporation trade on a non-US exchange, while the ADRs trade on a US exchange. Two banks are involved in maintaining an ADR: an investment bank and a depositary bank.

The investment bank purchases the foreign shares and offers them for sale in the US. The depositary bank handles the issuance and cancellation of ADRs certificates backed by ordinary shares based on investor orders, any other services, but is not involved in selling the ADRs.

NAIC Stock Selection Guide

Section 1 – Visual Analysis (sales, EPS and net profit by year, also, high and low price)

Section 2 – Evaluating Management

Section 3 – Price-Earnings History

Section 4 – Evaluating Risk and Reward

Section 5 – Five-Year Potential

Visualizing the Data

Visual Analysis

EPSEPS

Hi / LowHi / LowPricesPrices

RevenueRevenue

Net Net IncomeIncome

Historic Growth

Projecting Earnings Growth

First Call – 20%

Visual Analysis – 17%

Value Line – 15% Sales, 17% Earnings

16.7% EPS Growth16.7% EPS Growth

Preferred Procedure

VL Data for Preferred Procedure

600 Shares Outstanding600 Shares Outstanding

PTMPTM = .20 / (1 - 0.23) = .20 / (1 - 0.23) = .2597 or 26% = .2597 or 26%

Projected 5-Year EPS

EPS growth is projected at 15%

$1.49 for last FY

$1.49 for TTM

5-yr EPS = (1.49)*(1.167)^5

Projected5-year5-year EPS is $3.22

Sec. 2: Evaluating Management

Key indicators of management:Pre-tax profit margin

Return on equity

Compare company’s ratios with its industry

Caution: The worse a company performs, the better value it may appear to be.

Trailing and forward PE drops

Projection at historic growth shows high projected return

Evaluating Management

SSG Section 2

Pre-tax profit over the past five years of 20.1% with an upward trend

Return on equity over the past five years is 17.9% with a slight downward trend

Trailing Pre-Tax Profit Margin

Pre-tax profit margin sometimes signals a problem before it is reflected in the EPS. No problem here.

Trailing EPS and Revenue Growth

Value Line Quality Indicators

Earnings Predictability—measure of the reliability of an earnings forecast. The most reliable forecasts tend to be those with the highest rating (100); the least reliable (5).

Financial Strength Rating—relative measure of financial strength of the companies reviewed by Value Line. The relative ratings range from A++ (strongest) down to C (weakest), in nine steps.

Value Line Quality Indicators

Financial Strength (B++ or better)

Earnings Predictability(85 or better)

Confirm Management Quality

Robinson Quality Rating

20.0 Fin. Strength13.8 Earnings Pred.12.9 Projected Sales11.8 Projected PTM

Total = 58.5

Sec. 3: Price-Earnings History

Accept or amend High and Low avg. PEs

Find 5-yr. high PE, low PE and avg. PE

Look for “signature PE” or range

Relative Value Current PE / Trailing PE

Current PE / Projected PE

Is PE expansion or contraction likely?Compare PE to projected growth

Price Earnings History

High PE of 28.5 and Low PE of 17.9

Average PE of 23.2

PE trending down

Steady growth often commands a higher PE

Sec. 4: Risk and Reward

Calculate high price in five years(Avg. High PE) x (Est. 5-yr. EPS)

Calculate low price in five years(Avg. Low PE) x (Est. 5-yr. low EPS)

Can use current EPS for 5-yr. Low

Find buy, hold & sell zones

Determine upside-downside ratio

Relative value (Current PE / 5-yr avg PE)

Risk and Reward

Upside / DownsideUpside / Downside

Buy – Hold – Sell Range

Sec. 5: Five-Year Potential

Average Total Annual Return Assumes stock reaches projected high PE in year 5

Easy to calculate

Compound Total Annual Return*Assumes stock reaches projected high PE in year 5

More complex calculation

Projected Average Return*Assumes stock reaches projected average PE in year 5

Also a complex calculation

* Both Toolkit and Stock Analyst compute these

Five-Year Potential

Return includes 0.7% dividend

Projected Average Return of 16.0% is based on average PE

Total Return of 20.4% is based on average high PE

Teva Conclusions

TEVA is a quality stock. Value Line financial strength is A but earnings predictability is only 55, RQR is 58.5

More likely to go up than downUpside/Downside ratio of 4.3

Fully pricedRelative value 106.5 < 110

Estimate Total Return of 20.4% and Projected Average Return of 16.0% (assuming High PE of 24.8)

Conclusion

Email: tyhughes@gmail.com

Materials can be found at:www.tyhughes.net/moosepond

Better Investing!