After the referendum, our analysts think Italian banks need to be aggressive. Plus, we're maintaining our fair value for Teva despite a departure, and Lululemon shares jump.
Jeremy Glaser: Italy says no; 5-star-rated Teva shakes up its executive suite; and can Lululemon boost profitability? This time on the Morningstar Weekly Wrap.
Although not a surprising result, Italian voters resoundingly rejected constitutional reform in last weekend's referendum. The market and our analysts don't view this vote as a cataclysmic event, but Morningstar Italy's Valerio Baselli thinks it will bring unwelcome instability.
Valerio Baselli: Of course, political instability is not ideal, but with 63 governments in the last 70 years, unfortunately this is not new for Italy. And we will indeed see the 64th in the next few months, probably after having locked down the Budget Act and reaching an agreement on the electoral law.
In such a context, it does not seem impossible the surge of an anti-euro political party. The possible exit of Italy from the euro, an event that has been discussed in recent weeks but that seems very unlikely to us, would have disastrous consequences for the European Union as whole, as well as the Italian banking system, which holds Italian debt.
Glaser: Our banking analysts think that the Italian banks need to now move forward aggressively with planned capital raises and reforms to help ride out any volatility.
Generic pharma giant Teva announced a surprise change at the top of its generic segment this week. Michael Waterhouse thinks this could be a cause for concern.
Michael Waterhouse: Teva's announcement this week that Siggi Olafsson, the CEO of its generics segment, will step down marks an unfortunate event in an already difficult time for the company. Teva faces a number of significant near-term challenges between pricing pressure in the generic drug industry, anticipated generic competition on its highly profitable multiple sclerosis drug Copaxone in 2017, and their recent $40 billion acquisition of the Actavis generics business. Olafsson's long history in the generic drug industry and previous experience at both Actavis and Teva gave us reasonable confidence in the firm's ability to integrate these two businesses. His departure now likely creates additional doubt around Teva's revenue synergy goals from the combination. While we acknowledge Teva has major challenges ahead and this executive departure potentially signifies more turbulence, we still think Teva has a narrow moat thanks to its scale and largest first-to-file pipeline in the generic industry, along with a few key branded products in the pipeline. We're leaving our fair value estimate unchanged for now and still consider shares undervalued.
Glaser: Shares of Lululemon jumped after the firm posted better-then-expected earnings and gave upbeat guidance. Morningstar's Bridger Weishaar sees Lululemon as having revenue and margin growth ahead of it given its ability to expand outside of the U.S. and Canada and improve its supply chain. But she is skeptical that profitably is headed to historically high levels given increasing competition from high-quality competitors like Nike and Under Armor. After the runup, shares are now trading above her fair value estimate.
And in case you missed it, Christine Benz shared our top picks for inflation protection this week.
