Good Coaching Pays Off
Teva Pharmaceutical and Walgreen
A few weeks ago, I watched some of the men's and women's NCAA basketball tournament. I didn't glue myself to the TV, but occasionally a game or two drew my interest. I tuned into a Connecticut women's game, because I knew the game would be well played--at least by the Connecticut team. Sure enough, the Lady Huskies started to build a lead, and then just kept on building until another blowout was at hand.
Most fans would become bored with such a lopsided affair, but I was intrigued by the methodical play of Coach Geno Auriemma's players. When Connecticut brought the basketball up the floor, the player with the ball jogged or ran up the floor--every time without exception. The ball carrier's fellow players ran up the floor ahead of her and quickly assumed their positions--every possession without exception. Once set, all Husky players continually ran to open spots to catch a pass or take a shot. No standing around waiting for the ball.
After a change of possession, the Lady Huskies would run to the other end of the floor and take up their defensive positions--no fast breaks allowed. The Connecticut players are also taught to play aggressively without drawing fouls. But when a foul was called on a player, she was taught not to pout or argue with the referee! Focusing on the game rather than on the referee is an important strategy for the team. One final observation, when one of Coach Auriemma's team members made a great shot or a great play, there was no celebration. Instead, the team's objective was to get down the floor to prepare for the next play, rather than to spend energy-drawing attention to the player's individual accomplishment.
Connecticut's methodical play and discipline made the game look easy, even against difficult opponents. Why then, couldn't other teams duplicate this approach and run up lots of wins? It would seem that Coach Auriemma's method could be utilized in many different sports at many different levels, including men's and women's college or professional basketball or other sports.
Let's take this example one step further. Why not use a tried and true strategy to invest successfully? Just keep repeating what works, play by the rules, and don't get distracted. In other words, your plan needs to be simple, written down, and followed every time without exception.
Your methodology for investing is, of course, very important. I prefer to use more than one method, because I want to be invested in growth stocks, under-valued stocks and conservative blue-chip stocks. Buying and selling three different types of stocks is not exactly simple, but if you hire a coach, you can simplify the process.
No, Coach Auriemma isn't available! But if you subscribe to one or more of Cabot's investment letters, our editors will teach you plenty of helpful lessons about investing and also recommend many excellent stocks. The best part is, you can send us an email at any time, and we'll answer your questions promptly. We will act as your coach. We have been guiding investors for 40 years, and we now offer investment letters with advice on growth stocks, value stocks, blue-chip stocks, high-yield stocks, Green stocks, foreign stocks and small-cap stocks. A list of our award-winning letters and a link to learn more about them appears in the footer of this advisory.
How can we try to find companies that keep their eye on the ball and don't get distracted?
As the editor of Cabot Benjamin Graham Value Letter, I look for companies with steady sales and earnings growth. I also look for lots of dividend increases. Just as importantly, though, I find out what management's plans are for the company's future. I poke around the company's website to find: Intentions to restructure; plans to focus on new areas or new products; and specific goals to attain sales and earnings growth.
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Two companies that have demonstrated steady, reliable growth in the past and boast talented management teams with visionary business plans are Teva Pharmaceutical and Walgreen.
Teva Pharmaceutical (TEVA) is based in Israel and develops, makes and sells generic and proprietary-branded (store brand) drugs. The company is one of the largest generic drug producing companies in the world and, in addition, sells active ingredients to other pharmaceutical companies.
TEVA purchased U.S.-based Barr Pharmaceuticals for $7.5 billion in 2008. Barr has increased Teva's generic drug sales significantly in the U.S. and in parts of Europe.
TEVA will acquire Ratiopharm, based in Germany, for $4.8 billion in 2010. The purchase will make TEVA the leading generic drug maker in Europe. The Ratiopharm acquisition will provide major cost savings and produce significantly higher profits for TEVA.
TEVA recently won two patent cases, which will allow the company to continue to develop and sell two important generic drugs.
Teva's generic drug business is growing more rapidly worldwide because consumers are opting for the lower priced generics. President Obama's healthcare plan favors the use of low-priced generic drugs.
Teva's product pipeline is very strong, with 216 new drug applications waiting for FDA approval, several of which could become blockbusters. Sales rose 21% during the first half of 2009, and EPS increased 12%. We forecast EPS growth of 26% for the next 12-month period with 17% growth thereafter.
Teva's sales and earnings have continued to grow despite the global recession. Sales, earnings, and dividends have increased every year since TEVA's initial public offering in 2000. The company's aggressive acquisition and product development programs are driving remarkable sales and earnings growth. Sales increased 24% and earnings per share jumped 26% during the past 12 months. Our forecast for the next 12 months includes sales growth of 20% and earnings per share growth of 30%.
TEVA shares are clearly undervalued at 13.0 times 12-month forward EPS. The dividend has been raised every year since 2000 and now provides a 1.2% yield.
Walgreen (WAG), founded in 1901, is the second largest drug store retailer in the U.S. In addition to 7,000 drug stores, the company operates 680 health clinics within existing stores and on employer worksites. WAG's clinics offer primary and acute care, pharmacy and disease management services, and health and fitness advice.
Walgreen typically adds new stores and renovates old stores, but occasionally acquires smaller competitors if the price is right. The company's strategy has led to steady, reliable growth for decades.
Walgreen recently acquired Duane Reade, based in New York City, for $1.1 billion cash. Reade will add significant sales and earnings and enhance WAG's future growth prospects.
Same store sales increased by 1.6% in March compared to an increase of 0.6% in February and a decrease of 0.6% in January. New management is renovating existing stores, cutting operating costs, and improving customer service. We foresee sales and EPS growth of 7% and 15% respectively for the next 12-month period followed by 14% EPS growth in future years. The dividend yield is 1.5% and growing.
Walgreen shares are undervalued at 14.6 times next 12-month EPS. WAG's stock price increased just 28% during the past decade while earnings and dividends more than tripled. We believe the company's stellar performance will now be rewarded and push WAG shares to our target sell price within the next one to two years.
J. Royden Ward
For Cabot Wealth Advisory
Editor's Note: You can read more about disciplined conservative investing and get continuing coverage of Teva Pharmaceutical and Walgreen in Cabot Benjamin Graham Value Letter. Our subscribers are holding lots of winners including: Cash America up 75%, Google up 82%, Reinsurance Group up 67%, ResMed up 71%, and Tractor Supply up 88%. Now that's impressive! Don't miss out on Roy's next recommendations. Click here to get started today!