Novartis (NVS) is one of the largest pharmaceuticals companies by revenue and is headquartered in Basel, Switzerland. The company specializes in research, development, manufacturing, and marketing of a broad range of healthcare products. The company deals in both prescription drugs as well as over-the-counter drugs.
We believe forward PE (price-to-earnings) and EV-to-EBITDA multiples are the two best valuation multiples to use when valuing Novartis (NVS) and other large pharmaceutical companies, given the relatively stable and visible nature of their earnings.
PE multiples are widely available and represent what one share can buy for an equity investor. On January 13, 2017, the company was trading at a forward PE multiple of ~15.1x. Other competitors like GlaxoSmithKline (GSK), Merck (MRK), and Pfizer (PFE) trade at forward PE multiples of 14.2x, 16.0x, and 12.3x, respectively.
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 ~14.9x.
Forward EV to EBITDA
On a capital-structure-neutral basis, Novartis currently trades at a forward EV-to-EBITDA multiple of ~14.5x, which is much higher than the industry’s average of ~10.0x. Other competitors like GlaxoSmithKline, Merck, and Pfizer trade at a forward EV to EBITDA of 9.4x, 10.0x, and 9.4x, respectively.
Novartis’s stock price has fallen by nearly 10.3% during the last 12 months, while analysts estimate the stock has a potential to return ~25.8% over the next 12 months. Analysts’ recommendations show a 12-month targeted price of $91.60 per share as compared to the last price of $72.79 per share as of January 12, 2017. Also, 60% of analysts recommend a “buy,” while 40% of analysts recommend a “hold,” according to Reuters’ consensus.
To divest the risk, investors can consider the Schwab International Equity Fund (SCHF), which holds 0.5% of its total assets in Novartis.