B12| Friday, November 8, 2019 THE WALL STREET JOURNAL.
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STREETFINANCIAL ANALYSIS & COMMENTARY
Even Toyota Needs Help Sometimes
The car maker’s decision to recruit partners to better position it for the sector’s future speaks volumes
Baidu’s
Search for
Growth
Isn’t Over
Company’s stock is
finally a value playThe Japanese giant announced a joint venture with Chinese electric-car pioneer BYD alongside quarterly results. A Mirai fuel cell vehicle.JOE WHITE/REUTERS
most of the generics industry.
And while Teva is cheap, it isn’t
remarkably so. The company’s debt-
adjusted market value is eight times
forward earnings before interest,
taxes, depreciation and amortiza-
tion, according to FactSet. The
three-year average is 9.6 times
Ebitda.
Still, positive surprises are possi-
ble. For instance, the legal matters
could be settled on favorable terms.
Or new products, such as a cheaper
version of the cancer drug Rituxan
could sell better than investors ex-
pect.
Most important, Teva will try to
refinance its debt load, Mr. Schultz
said. More than $6 billion in debt
comes due in 2020 and 2021, ac-
cording to FactSet. With low inter-
est rates and high demand for junk
bonds, that seems plausible.
Recovering from past errors is a
long-term project. But pending
Teva’s next checkup, the patient
seems to have stabilized.
—Charley GrantForTeva Pharmaceutical Indus-
triesshareholders, a little improve-
ment goes quite a long way. The be-
leaguered generic drugmaker’s
third-quarter earnings, while mixed,
gave investors some reason for op-
timism.
Sales of $4.3 billion fell by 6%
from a year earlier, while the net
loss widened to 29 cents a share
from 27 cents. However, the posi-
tives were strong enough to send
shares more than 4% higher Thurs-
day: Teva generated $551 million of
free cash flow in the quarter and
raised the low end of its profit and
cash-flow guidance.
That is paramount, given Teva’s
need to clean up its balance sheet.
During the quarter, the company
paid down nearly $2 billion of debt,
reducing its outstanding burden to
below $27 billion. That is down
more than 20% from the peak in
2016, shortly after an ill-fated $40
billion acquisition of the Allergan
generics unit. The stock has fallen
more than 80% from its record in
2015.
A return to those highs is un-
likely. Sales of its branded multiple
sclerosis drug Copaxone fell 41%
from a year earlier in the third
quarter as fresh generic competi-
tion took its toll. The cash flow
Teva did generate came, in part,
from heavy cuts to administrative
spending and research and develop-
ment.
Chief Executive Kare Schultz told
The Wall Street Journal in an inter-
view that he is confident those cuts
won’t harm Teva’s long-run earn-
ings power. But that remains to be
seen. And Teva continues to face
the possibility of heavy legal ex-
penses, thanks to opioid-related
lawsuits and an unresolved price-
fixing scandal that has ensnaredTevaPharmaceutical
IndustriesADRs*Source: FactSet*American depositary receipts$9.006.006.507.007.508.008.50Sept. Oct. Nov.It is revealing that evenToyota
Motor, which makes more profit
than any other car maker globally,
doesn’t feel it can face the future of
the auto industry on its own.
The Japanese giant announced a
joint venture with Chinese electric-
car pioneerBYDalongside quarterly
results Thursday. Starting next year,
both companies will contribute en-
gineers from their research-and-de-
velopment departments into a new
Chinese unit that will design bat-
tery cars and the necessary produc-
tion platforms. Toyota pioneered
hybrid technology with the Prius
launch in 1997, but it has been slow
to invest in batteries or plug-in
cars—BYD’s specialties.
The deal is the latest in a string
of partnerships aimed at sharing
the burden of technology invest-
ments, particularly for electric cars.
Following a policy President Akio
Toyoda has called “creating
friends,” Toyota has this year also
formed sweeping alliances withPa-nasonic,Tesla’s battery partner;
Contemporary Amperex Technol-
ogy, China’s other big battery sup-
plier; smaller Japanese car makers
SubaruandSuzuki Motor;and
Denso, Japan’s top auto parts sup-
plier (and once part of Toyota).
This activity is all the more strik-
ing because Toyota’s financial re-
sults are showing fewer signs of
pressure than many of its global
peers. The company said Thursday
that it sold 5% more vehicles in the
six months through September
compared with the same period last
year, and made an operating margin
of 9.2%, up from 8.6%.
Part of the recent improvement
can be explained by a recovery in
Japan after sales were hit by an
earthquake last year. Japanese con-
sumers also rushed to buy cars be-
fore an increase in the sales tax in
October, giving the numbers a tem-
porary boost. Meanwhile, Toyota’s
big U.S. operation is making up lost
ground after it was caught out intrillion. With research and capital
spending under control, margins
are expected to remain steady.
Toyota isn’t just bigger than any
other car maker in terms of profits
and market capitalization, it is bet-
ter diversified. The company is still
strongest in Japan, but it has suffi-
cient scale to turn a profit in all its
reporting regions. By comparison,
Detroit has become perilously de-
pendent on the strong U.S. market
for bigger vehicles, while European
players are bearing the full brunt of
the European Union’s regulatory
crackdown on carbon emissions.
Toyota’s strength in hybrids means
it isn’t scrambling to adapt to the
new EU rules yet, though in time it
will need to sell lots of potentially
unprofitable all-electric vehicles.
When even Toyota worries that it
doesn’t have the resources necessary
to tackle the changes under way in
the car industry, investors know life
for auto makers is getting tough.
—Stephen WilmotGood news: Search company
Baiduhas become a value play. The
bad news is that China’s answer to
Google is no longer a growth stock.
Operating income last quarter al-
most halved from a year earlier, the
company said in a results an-
nouncement Wednesday after the
market close. That, however, was
enough to beat grim expectations,
and its Nasdaq-listed shares rose
more than 13% Thursday.
The big reason for the beat was
cost cutting. Its sales, general and
administrative expenses came to
17% of revenue last quarter, com-
pared with 20% a year before.
After shedding nearly two-thirds
of its market capitalization from
last year’s peak, Baidu now offers
good value. The company is sitting
on around $11 billion of net cash
and short-term investments, includ-
ing the $1 billion it got from selling
down its shareholding in Trip.com
recently. Its remaining 12% stake in
the online travel agency together
with its 57% share of video subsid-
iary iQiyi are worth $9.5 billion.
That means its core search busi-
ness, which generated around $1
billion of free cash flow last quarter
alone, is valued at just $17 billion.
The problem for investors is that
growth seems elusive. China’s on-
line-advertising market has under-
gone dramatic changes over the
past year afterByteDance, owner
of short-video app TikTok, entered
the scene. The company’s addictive
apps—Douyin, the Chinese version
of TikTok, and news aggregator
Toutiao—have attracted eyeballs
and ad dollars alike.
Baidu’s core advertising revenue
fell 9% last quarter from a year ear-
lier, the second consecutive quarter
of decline. Its overall revenue was
stable thanks to subscription
growth in iQiyi, a Netflix-like video
service, but that business remains
in the red.
Baidu stock may now be cheap
enough that it won’t fall much fur-
ther. For a return to the good old
days, though, the company will
need to show growth potential.
—Jacky Wongprevious years by the rapid shift in
sales away from sedans to trucks
and sport-utility vehicles. In North
America, the operating margin
jumped to 4%, from 2.5%, though
that still leaves it the company’s
least profitable region.
But these are details in an overallpicture of profitable stability. Toy-
ota didn’t change its forecast of
¥2.4 trillion ($22 billion) in operat-
ing income for the fiscal year
through March 2020. Strip out the
strengthening Japanese currency
and that would be a slight improve-
ment on last year’s total of ¥2.47The deal is the latest
partnership aimed at
sharing the burden of
technology investments.Teva Pharmaceutical’s
Results Are in Recovery
Roku Gets Splashed by TV-Streaming Wars
Rokuis one of the smallest sol-
diers in the streaming wars. It may
also have one of the biggest tar-
gets on its back
The maker of TV-streaming de-
vices registered a stock decline of
16% Thursday after reporting
third-quarter results the previous
day. Those results weren’t exactly
bad. Revenue jumped 50% year
over year to $260.9 million, while
platform revenue from selling sub-
scriptions and ads surged 79% to
$179.3 million. Both exceeded Wall
Street’s forecasts.
But the company’s revenue fore-
cast for the fourth quarter was
deemed a disappointment, with the
midpoint suggesting 39% growth
from a year earlier, barely above
Wall Street’s targets. The addition
of 1.7 million net new active ac-
counts in the third quarter also fell
slightly below analyst forecasts.
Roku is one of the largest mak-ers of TV-streaming devices, ac-
counting for about one-third of
connected TV viewers in the U.S.,
according to eMarketer. Those de-
vices power a platform on which
the company can sell ads and sub-
scriptions to streaming services
such asNetflix, Hulu and now Ap-
ple TV+. But with annual revenue
expected to just break $1 billion
this year, Roku is still a fraction of
the size of other players in stream-
ing such Netflix and media titans
includingWalt DisneyandAT&T.
But the company has become
nearly synonymous with cord-cut-
ting, and thus has been one of the
most favored names by investors
looking to play the shift to stream-
ing. Before Wednesday’s results,
Roku’s share price had surged
nearly fivefold just since the start
of the year.
Even with Thursday’s drop, the
stock is still fetching about 10times forward revenue—roughly
double the multiple of Netflix,
which itself is hardly considered
cheap.
That is a lot to put on a com-
pany still not generating operating
earnings or positive free cash flow
on a reliable basis. And it makes
Roku’s shares extra vulnerable to
even small perceived challenges.
The stock fell in September after
AppleInc. laid out the plans for its
new, low-price streaming service
that will actually end up contribut-
ing to Roku’s platform business.
Other challenges are more real,
such asComcast’s plan to make its
own streaming device free to users
of its broadband internet service.
Roku’s shares fell on that news as
well, only to recover most of their
lost ground before Thursday. In-
vestors, it seems, want to keep
Roku in the bull’s-eye.
—Dan GallagherWhen people think hotel, do
they immediately think
Trivago? Or do they turn to
Google first? Despite Trivago
parent Expedia Group’s best ef-
forts on advertising, for many
people the answer evidently is
Google.
Expedia and its rival TripAdvisor
reported disappointing quarterly
earnings on Wednesday afternoon
and Thursday morning, respectively.
Shares of both companies fell more
than 20% Thursday. Both blamed
changes in Google’s algorithm that
made their hotel listings less visible.
“It’s always hard to know exactly
what Google is doing. We think of it as
how far down the page we are,” saidTripAdvisor Chief Executive Stephen
Kaufer on a conference call.
Getting less help from Google means
the companies have to do more to ap-
peal to customers directly. That likely
means even more advertising.
“Television and digital advertising
where we can really feature more promi-
nently the brand and build the brand and
really scream what’s different about the
brand has been part of the formula” for
reducing reliance on search engines, said
Mark Okerstorm, chief executive of Ex-
pedia, which also owns Hotels.com, Trav-
elocity and Orbitz.
So when television viewers see even
more of the Trivago pitch man and the
TripAdvisor owl, they should remember
to blame Google.ADRIANA ADINANDRA/SOPA IMAGES/ZUMA PRESS
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