“Front-Running Buffett” with Ian Wyatt

This note is very different from what I would write were it entitled, “Front-Running Buffett with David Sokol” — but since he has ended up in the SEC’s crosshairs, and been thrown under the bus by Warren since he made the ridiculously foolish choice to buy shares in a stock he was scouting out as an acquisition for Berkshire, well, maybe we’ll do better “front-running” Wyatt’s way, no?

The pitch is for what Ian Wyatt calls the “Warren Buffett Retirement Plan” — which sounds awful on the face of it, since I aspire to retire far, far earlier than Warren Buffett, who will be working until he loses his marbles or says his last goodbyes. But he teases a few stocks that he seems to think would fit Buffett’s criteria, and we could probably do worse than that (even ignoring, for the moment, that Buffett and his family already have a retirement plan, and it’s called “Berkshire Hathaway Shares”). So what are they?

Well, Wyatt will tell you if you shell out a hundred bucks for his Top Stock Insights newsletter — but you know me, I prefer something a little more freelicious, so it’s time to dig into the clues.

We’ll find at least the first one for you today, with the Thinkolator on standby to chew on the others — Wyatt calls it “The company Buffett CAN’T Buy” … here’s the tease:

“Five years ago, Warren Buffett bought a European pharmaceutical and healthcare products company called Sanofi-Aventis (NYSE: SNY).

“Since then, the stock has gone pretty much nowhere.

“But as you know, Buffett’s favorite holding period is forever. It’s not like he has much time left – but that’s not why he owns Sanofi-Aventis.

“You see, over the last five years, while the stock traded sideways, Buffett’s been collecting bigger and bigger dividends. In the first year, he collected $8.9 million in dividends – which admittedly isn’t that much for Buffett.

“But what’s truly impressive is the dividend growth.

“Because last year Buffett’s holding company collected over $13.7 million in dividends.”

And as you can imagine, this stock that Wyatt’s teasing today is compared to Sanofi …

“That’s exactly why I’m adding a similar dividend paying pharmaceutical company to my Warren Buffett Retirement plan.

“It’s even raised its dividend in the same exact way…”

That’s where we get a nice little chart, showing how the dividend went from 25.46 cents in 2006 to 66.95 cents last year. Which means it must be a foreign stock and we’re getting some very precise currency translation, because otherwise a company would be asinine to plan a dividend that has to go out four decimal places.

We’re told that this stock is cash-rich, and then a couple more tidbits to point us in the right direction:

“… this company is a spitting image of Sanofi-Aventis.

“It’s in a tiny domestic market, but that’s not its target. It has strong global sales to take advantage of growing overseas economies–particularly North America and Europe–just like Sanofi Aventis.

“And like Sanofi-Aventis, it’s a simple business with very clear profit centers. You could buy this company and fall asleep for ten years and not have to worry about it–it’s what Buffett calls a Rip Van Winkle business.

“The company was founded in the early part of the 20th century, and they haven’t changed much since then (other than make more and more money every year)–they make many of the same products and reward their shareholders with steady profits.

“If that’s not enough, this company also pays nearly a $1 dividend.”

So who is it? Let’s toss all that info into the mighty, mighty Thinkolator … let it spin for a few minutes … and we find that this must be …

Teva Pharmaceuticals (TEVA)

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The main reason we can be confident about this is that the chart Wyatt uses to display the consistently rising dividend is lifted (without attribution) from Morningstar — though different sites calculate the dividend differently. Yahoo Finance, for example, says that Teva paid a total of 74.8 cents in 2010, Morningstar says they paid 66.95 cents. I expect the difference has to do with currency translation or taxes, but I don’t really know.

Teva is the biggest producer of generic drugs in the world, by far — its sales are close to that of all the other big, public generic drug companies in the world put together (that would be folks like Sandoz, which is a division of Novartis (NVS), Dr. Reddy’s in India (RDY), Mylan (MYL), Watson Pharma (WPI) and Impax (IPXL)). It’s also the largest company in Israel, which must be what Wyatt means when he refers to its “tiny domestic market,” Israel is still their home but it provides less than 5% of Teva’s revenue. The company sells and manufactures drugs all around the world, with it’s biggest market by far being, as you would expect, the United States.

And no, there isn’t any particular reason why Buffett couldn’t buy Teva if he wanted to, so maybe you could be “front running” him as Wyatt says, though there’s no particular indication that Buffett will buy these shares — despite the recent Lubrizol and Burlington Northern Santa Fe buyouts, his stated preference is to buy companies in their entirety, and Teva’s a little big for that.

So he might not be able to buy the whole company even if he wanted to, but he couldn’t (or didn’t) buy all of Sanofi-Aventis, either. Berkshire Hathaway could certainly buy shares of Teva for their publicly traded stock portfolio if they wished — and I suppose it’s possible that they might own some shares now, Buffett reports Berkshire’s large holdings in their annual reports and quarterly filings, but the smaller holdings aren’t all named, and if Berkshire bought shares in Israel they wouldn’t have to be reported in the same clear way as US stocks unless they reached a pretty large holding percentage (that’s why you haven’t see much from the SEC about Berkshire’s holdings in Posco or Tesco, Berkshire holds those shares in Seoul and London, not the ADRs).

But that’s really an academic exercise — unless you’re David Sokol, the chances of picking Buffett’s next purchase and buying it before he gets there are extremely slim. The real question is, do you want to buy Teva for your own reasons?

Well, if you’re like me, your first glance at Teva will make you drool — it’s growing like crazy, it’s cheap as all get out, and it’s in a sector that’s dramatically increasing in size (both generic and branded pharmaceuticals). The second glance, when you start to look at the competition, the patent expirations, and the legal and regulatory challenges … well, that might slow the drooling down a little bit and make you realize that there’s a reason that it’s cheap.

But still, it’s really cheap. Teva shares are trading for about 12X trailing earnings, and at about 9X 2011 estimated earnings, with earnings growth expected to keep growing at double-digit rates (OK, barely double digit — 10%) for the next several years. That’s not the same kind of dramatic growth that they had as a much smaller company 10 or 20 years ago, but it’s still really good growth for a company with a market cap of nearly $50 billion, and it gives them a Price/Earnings/Growth (PEG) ratio of just below 1, which some folks consider bargain territory.

The forward PE ratio of 8 or 9 will look familiar to pharma investors — that’s what you’ll pay for someone like Pfizer (PFE) or Merck (MRK) or, indeed, Sanofi-Aventis (SNY), and all of those firms pay out substantially higher dividends than Teva … but all of them are also expected, thanks to patent expirations for the most part, to grow far less slowly, or even to shrink (the big pharma stocks generally have PEG ratios in the neighborhood of 3 or so). Teva’s dividend has been growing nicely and consistently for many years, but at a bit less than 2% it’s not quite enough to entice the income-focused investors who are attracted to some other pharmaceutical stocks.

And that’s part of what’s keeping Teva down, too — for although the vast majority of their sales are in generic drugs, where they are the clear industry leader, they are also branching into branded pharmaceuticals with drugs that they’ve developed themselves (or acquired) … and the branded pharmaceuticals, particularly their blockbuster MS drug Copaxone, sell at much higher margins, so they contribute substantially to Teva’s bottom line — Copaxone itself has generated almost half of Teva’s profits in recent quarters, though that’s modeled to decline as the portfolio becomes more diverse before the patent expiration. Copaxone goes off patent in 2014, so analysts are looking at that as a problem … but before that, it may also face stiff competition from newer MS drugs in development that can be delivered orally (Copaxone is injectable), and recent news about Teva’s own possible oral Copaxone replacement, laquinimod, hasn’t been as encouraging as the good results from competitors with similar drugs like Biogen Idec (BIIB). (Teva would probably remind you that we can’t know