Ever since the political climate heated up in the run-up to the last presidential election, drug stocks have come under severe scrutiny. Allegations of overpricing, first from Hillary Clinton and then from her opponent, now President Trump drove down prices and led to an industry-wide crisis. Appreciably high prices for a class of drugs which are supposed to be inherently cheaper led to a Department of Justice investigation into price fixing.

Of course, the generics industry has been quick to point out that a variety of factors have been pushing up drug prices in recent times. Generics producers have been forced to close plants after being issued directives to such an effect by the FDA. Additionally, they have had to do away with unprofitable drugs and deal with industry wide consolidation.

With Mylan N.V. (MYL - Free Report) and Teva Pharmaceutical Industries Ltd. (TEVA - Free Report) scheduled to report on May 10 and May 11, respectively, this may be a good time to consider which of these is the better stock. Both stocks carry a Zacks Rank #3 (Hold) rating.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

Over the last six months, the generics industry as a whole, as well as both the stocks under consideration, have remained depressed. While the Zacks Medical - Generic Drugs Industry has lost 6.9% over the last six months, Teva has fallen by a whopping 23.1%. Here, Mylan stands out, since it is down only 2.3% over the same period.

Valuation

The most appropriate ratio to evaluate these two drug makers is likely EV/EBITDA. This metric is usually used to compare two stocks within the same industry. It is superior to other metrics such as P/E because it is not affected by the different capital structures of the two companies. While Mylan is more generics focused, Teva has other major product lines such as biosimilars.   

First, it is important to consider where the industry as a whole stands from a valuation perspective. Here, we can see that with an EV/EBITDA of 8.49, the generics industry is significantly undervalued compared to the S&P 500, which has a value of 10.21.

Coming to the two generics producers, both Mylan and Teva are undervalued relative to their broader industry. However, Teva holds the edge here with a lower EV/EBITDA value of 7.58, compared to Mylan’s value of 8.12.

Dividend Yield

In the last year, Teva offered a dividend yield which was higher than the broader industry. While the generics industry offers a yield of 0.93%, Teva returns 3.75%. Since Mylan has a dividend yield of 0%, the Israel-based drug maker wins this round fair and square.

Gross Margin

Traditionally, generics are supposed to be cheaper than their branded counterparts. This is because such drug makers do not have to spend steep amounts on research and development. They only introduce cheaper variants of a previously copyrighted drug into the market once the legal protection expires. This also explains why their profit margins are higher despite the fact that usually charge lower prices.

Both Teva and Mylan underperform the industry, which has a gross margin TTM of 57.6%, on this count. However, Teva outperforms Mylan since its gross margin TTM is significantly higher at 54.1%, compared to its rival’s level of 42.4%.  

Earnings History, ESP and Estimate Revisions

Considering a more comprehensive earnings history, Teva has delivered positive surprises in all the prior four quarters, with an average earnings surprise of 3.4%. In comparison, Mylan delivered an earnings beat in three of the trailing four quarters, with an average positive earnings surprise of 1.4%.

When considering Earnings ESP, there is nothing to choose from between the two stocks since both have negative ESP values. However, with an ESP of -4.85%, Teva is at a disadvantage, since Mylan holds a value of -2.17%. At the same time, Teva’s earnings estimate for the current year has increased by 0.8% over the last seven days, compared to Mylan’s increase of 0.4%.

Conclusion

Our comparative analysis shows that Mylan holds an edge over Teva when considering price performance and ESP. However, when considering EV/EBITDA ratios, gross margins, estimate revisions and a more comprehensive look at its previous earnings performance, Teva is clearly a better stock.

What clinches the case in favor of Teva is the fact that it offers a superior dividend yield of 3.75%, while Mylan has a dividend yield of 0%. This is why it may be better to bet on Teva over Mylan as they prepare to report earnings later this week.