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Changes in Novartis’s Valuation for 3Q16

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Nov. 16 2016, Updated 4:04 p.m. ET

Valuation multiples

We believe that forward PE (price-to-earnings) and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples are the two best valuation multiples when valuing Novartis AG (NVS) and other large pharmaceutical companies. This choice is due to the stable and visible nature of their earnings.

PE multiples are widely available and represent what one share can buy for an equity investor. EV-to-EBITDA multiples, on the other hand, are capital structure neutral.

The above graph shows forward PE for Novartis compared to the industry average.

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Forward PE

On November 14, 2016, Novartis was trading at a forward PE multiple of ~15.1x. Based on the last five years’ multiple range, Novartis’s current valuation is neither high nor low. The PE multiple has ranged from ~9.0x to ~20.0x.

Novartis’s valuation multiple has also followed the industry’s overall trend over the last five years. Whether the healthcare sector’s forward PE multiple rises or falls, Novartis will definitely be affected. The industry currently trades at a forward PE multiple of ~14.3x.

EV-to-EBITDA

On a capital structure neutral basis, Novartis currently trades at ~14.8x, which is much higher than the industry average of ~10.0x.

The above multiples represent an improvement in estimates and valuations for Novartis, which is a positive sign for investors. To divest the risk, you can consider ETFs such as the First Trust Value Line Dividend ETF (FVD), which holds ~0.50% of its total assets in Novartis, 0.50% in Bristol-Myers Squibb (BMY), 0.50% in Sanofi (SNY), and 0.50% in Johnson & Johnson (JNJ).

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