Is Novartis Stock Undervalued?

Swiss pharmaceutical company Novartis (NYSE:NVS) is among the largest drugmakers in Europe, coming in behind only Novo Nordisk and AstraZeneca in terms of market capitalization as of the beginning of 2024.

Despite its size and strong profitability, Novartis stock has had a lackluster first half of the year. NVS shares have advanced just 1.9% YTD, compared to the S&P 500’s gain of 10.0%.

Is the market undervaluing Novartis, or does the out-of-line return reflect deeper concerns about the pharma major’s business?

How Is Novartis Performing?

On the whole, Novartis is attractive as a business. In the trailing 12-month period, the company reported a net margin of 31.3% resulting in total net income of $14.9 billion. It has also generated respectable growth over that period. In Q1, Novartis reported revenue growth of 10% year-over-year for a total of $11.8 billion in the quarter.

Though the revenue growth of the last year has been strong, the company is far from setting sales records. Novartis’ annual revenues peaked in the early 2010s. The company has had its ups and downs since then, the general trend has been one of slow decline. At the end of 2011, Novartis reported annual revenue of nearly $60 billion. In 2023, the number was $46.7 billion.

As impressive as the company’s revenue growth was in the last 12 months, net income growth proved even better. In Q1, Novartis reported a net income increase of 25% over the year-ago period. This translated to 28% earnings per share growth as the company has repurchased about 3% of its shares in the past year.

Unlike revenue, Novartis has managed to keep EPS rising through a combination of careful cost management and share buybacks. During the revenue peak of 2011, Novartis reported earnings of $3.70 per share. In 2023, the company’s earnings totaled $7.10 per share.

Analysts are also optimistic about the potential for continued earnings growth from Novartis. Over the next five years, the company’s EPS is expected to keep growing at a rate of 8.0% annually.

Revenue, however, could continue to stagnate. In the coming 12 months, Novartis’ total sales are only expected to rise by about 0.4%. This dynamic of rising earnings and stagnant revenues makes the company less appealing as a long-term investment.

A Look at Novartis’ Valuation Metrics

A quick glance at Novartis’ multiples reveals that the company is something of a mixed bag value-wise.

On the plus side, Novartis trades at 14.2x expected forward earnings and an even more attractive 9.3x cash flow.

Looking at price-to-earnings-growth reveals a ratio of 1.6. This ratio could indicate modest overvaluation, though in light of the P/E ratio it’s likely at an acceptable level.

Likewise, the stock’s 4.3x price-to-sales ratio is a bit high but likely doesn’t take NVS out of a reasonable value range.

Does Novartis Still Have Growth Catalysts?

Though the stock appears more or less fairly valued right now, there are some growth catalysts in the pipeline that could drive up earnings and change its valuation. Primarily, the company is focusing on continuing to deliver new drugs that should help it to raise its revenues and, by extension, its earnings.

A strong example of this innovation initiative was seen recently as the company reported clinical trial results for a new leukemia drug. That drug resulted in improved molecular response rates compared to Novartis’ own existing benchmark therapy for newly diagnosed leukemia patients.

Other drugs in the Novartis pipeline include a range of new potential oncology pharmaceuticals, therapies for migraine headaches and new treatments for common conditions like cardiovascular disease and arthritis.

The company is also continuing to generate sales growth from its existing portfolio of medications. In Q1, for instance, sales of multiple sclerosis medication Kesimpta rose by 66% on a constant currency basis due to increased demand for self-dosed treatments for the disease.

By broadening its portfolio and generating more value from its current offerings, Novartis could eventually buck the long-term trend of falling revenues. This effort, however, is likely to take quite some time.

What About the Dividend?

In addition to price appreciation, it’s worth noting that NVS does pay an annual dividend. Unlike most companies that set quarterly dividend rates once a year, Novartis delivers an inconsistent dividend in the first quarter of each year.

When the company paid out its dividend this year, the distribution was $3.77 and the yield was 3.1%.

However, it’s difficult to predict what the yield could look like by the time the company pays its next dividend in 2025.

Is Novartis Stock Undervalued?

Analysts forecast Novartis will reach a median target price of about $116.50 in the coming 12 months and is undervalued therefore by 13%.

It’s worth noting that this could leave room for Novartis to track or slightly beat the market. The S&P 500 index is expected to rise by about 11-13% over the same period.

All other things being equal, Novartis doesn’t appear to be a compelling deal at the moment. The stock likely trades at or slightly below a fair price, giving investors a limited margin of safety. However, NVS is well worth watching to see if it can revitalize its revenue growth with new medications.

Right now, the consensus rating of hold on this stock seems reasonable. Investors who already own the stock will likely benefit from a combination of decent dividends and respectable price appreciation over the next year.

With NVS expected to generate returns similar to that of the S&P 500, though, there may not be sufficient reason to buy this stock as opposed to a broad index fund. Novartis is attractive as a business, but the price doesn’t appear quite low enough to entice value investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.