Why Teva Pharmaceutical and Under Armour Are Looking So Unhealthy

8/9/17

Courtesy of Motley Fool

In this segment from Motley Fool Money, host Chris Hill, Million Dollar Portfolio's Jason Moser, Total Income's Ron Gross, and Supernova and Rule Breakers' David Kretzmann first consider the confluence of ugliness that came together last week for Teva Pharmaceutical (NYSE:TEVA). There was an earnings miss, a guidance reduction, a dividend cut, CEO troubles, debt troubles, patent expirations, and more. Is there any good news for this massive drugmaker? And is the stock a bargain yet -- or a falling knife?

Then they dig into the issues at Under Armour (NYSE:UA) (NYSE:UAA), where a quarterly loss, lower guidance, and news of layoffs propelled the stock a new low. What can founder and CEO Kevin Plank do to get his company back to the growth that it was still enjoying just a year ago?

A full transcript follows the video.

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This video was recorded on Aug. 4, 2017.

Chris Hill: Teva Pharmaceuticals is the largest maker of generic drugs in the world, and this week it got a lot smaller. Second-quarter results were low, they cut their dividend by 75%, and in just one week, Ron, Teva has lost one-third of its market cap.

Ron Gross: I don't know where to begin. It's a perfect storm of badness, nothing good coming here, as you said. Earnings fell short, they cut their guidance, they cut their dividend, they announced they may breach debt covenants, their debt is pretty large as a result of an acquisition. They do not have a CEO and they're having trouble finding a CEO. They're losing patent protection on their biggest branded drug which is...you know how to pronounce it, right? Copaxone?

Hill: No, I leave that to experts like you.

Gross: And, there's an activist that's saying they should be splitting the business into two different divisions, one focused on generic and the other on specialty medicine. There's really almost nothing going well here, and it's obviously reflected in the stock price.

Jason Moser: Glass-half-full guy, here.

Gross: [laughs] The pricing environment in generics is tough right now. The competition is tough, and they really can't get out of it their own way. And without a strong CEO at the helm, this is not going to turn anytime soon. As an investor, I would stay away. There's too much uncertainty, even though the stock has been pretty much destroyed. They need to get a really strong CEO in there, and they're going to have to pay up, unfortunately, to get that, because no one seems interested right now.

Moser: But given the headwinds, you have to agree that cutting that dividend, you know, it was a very large cut at 75%, that has to be the right move. That's a prudent play because you can always push that thing back up once you get this thing turned around.

Gross: Yeah. While painful, cutting their dividend is the right move, especially if you have a lot of debt and cash flow problems, then you need to make that painful move. And you count on the strong management team, of which they have no one at the helm right now, unfortunately, to make those tough decisions, even if it's painful in the short term.

Hill: Shares of Under Armour hit a new low this week. A loss in the second quarter combined with lowering guidance, combined with the announcement of layoffs, and Under Armour's stock has been cut in half in just one year's time, Jason.

Moser: Yes. It's not been a very good stretch here for Under Armour. It went from one quarter just about a year ago where it seemed like they could do no wrong, to literally a point now where it seems like they can do no right. I'd like to believe we've hit this point where the founder and CEO Kevin Plank has hit a point where perhaps he recognizes that he needs help. I think he's gotten to a point where he's just a little in over his head, maybe, at this point. He has to figure out a way to take his business to the next level, to take that next step. So, on the bright side, he does have an executive team in there with him now. A new CFO, a new COO, and I think they help make some more measured decisions, some deliberate growth, without having to feel like you have to make these big, splashy acquisitions and whatnot to keep in the headlines. Let's be clear -- Under Armour, to this point, had it really seemingly pretty easy. Every quarter it was lobbying up over 20% revenue growth, and everybody was loving it, it was the next Nike and they could do no wrong. Now they've run into this buzz saw, where the top-line growth is slowing down, and they need to figure out what to do to help get that back going again.

The bright side, the international business is performing very well, and that continues to be a source of excellent growth here in the coming years. Direct to consumer grew 20% in the quarter, it's now 35% of total revenues. The downside there, I think they still haven't gotten out in front of this connected fitness acquisition they made a while back. I think we're going to see a big writedown here by the end of the year, if not early next year, on that acquisition. They continue to frame it like it gives them a lot of data for their customers and what not, and they paid a lot of money for those apps that I don't think are really bearing the fruit they were hoping for. So, there's plenty of reasons to be optimistic. To frame it here for you, Coach -- which we've been ragging on for about the past five years here, Chris -- is now double the market cap of Under Armour. Think about that for a second. That's how bad it really is for Under Armour, and how well Coach has really turned their business around. I think Under Armour holds a very powerful brand, and a very big market opportunity, so as long as Kevin Plank can keep his executive team with him, there will be brighter days ahead, but it's going to take a little while.

David Kretzmann: I think the one bright spot with Under Armour going through these troubles is, they do have to become more disciplined and focused, and focus on what they're really good at. Bringing on new leadership in the form of a new COO last month, that'll help Plank stay focused on what he does do good at with the brand. But, the connected fitness dilemma hurts right now. When I was at CES in January, that was pretty much all Kevin Plank talked about in his keynote presentation, was how great these connected fitness apps were. But, boy, I think a writedown is coming.

Hill: We were talking last year about Nike and how they decided to get out of the golf equipment business altogether. And it wasn't like they were pouring money down a hole there over at Nike, and it wasn't like they couldn't afford it, but they just decided, this isn't where we want to focus our energy. And I'm wondering how quickly Under Armour may come to the same realization, where they say, you know what, we're in this one particular part of the business, and it's not going as well as we want, and we just need to cut bait.

Moser: My hope is that they will recognize that sooner rather than later. I feel like Plank has bandied about that connected fitness line. It's lost all meaning. It's like in Fletch when he says "It's ball bearings," you're like, what does that mean? You say connected fitness, but you're not connecting the dots on how it monetizes. And I think the reason they're not connecting those dots is because it's clearly far more difficult than they thought it would be.

Gross: And they're suffering from brand identity. Are they performance? Are they connected? Are they a full athleisure company? What are they now, and what are they focused on? I think they need to figure that out.

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