Novartis’s Valuation after 1Q17 Earnings



What is Novartis?

Novartis (NVS) is one of the largest pharmaceutical companies by revenue. It’s headquartered in Basel, Switzerland. The company specializes in the research, development, manufacturing, and marketing of a broad range of healthcare products. It deals in both prescription drugs and over-the-counter drugs.

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

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Forward PE

PE multiples are widely available and represent what one share can buy for an equity investor. On April 27, 2017, Novartis was trading at a forward PE multiple of ~15.8x. The industry currently trades at a forward PE multiple of ~15.9x.

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. Other competitors such as Pfizer (PFE), Eli Lilly (LLY), and GlaxoSmithKline (GSK) have forward PE multiples of 13.0x, 19.3x, and 15.1x, respectively.


On a capital structure neutral basis, Novartis currently trades at an EV-to-EBITDA multiple of ~15.2x, which is much higher than the industry average of ~10.1x. Other competitors such as Pfizer (PFE), Eli Lilly (LLY), and GlaxoSmithKline (GSK) have forward EV-to-EBITDA multiples of 10.1x, 13.9x, and 9.3x, respectively.

Analyst recommendations

Novartis stock has fallen nearly 0.70% over the last 12 months. Analysts estimate that the stock has a potential to return ~12.3% over the next 12 months. Analyst recommendations show a 12-month target price of $85.75 per share compared to its last price of $76.35 per share on April 26, 2017.

About 60.0% of analysts are recommending a “buy” for the stock, and 40.0% are recommending a “hold.” The consensus rating for Novartis stands at 2.0, which represents a moderate “buy” for long-term growth investors.

To divest the risk, investors can consider ETFs such as the SPDR S&P International Health Care Sector ETF (IRY), which holds 11.5% of its total assets in Novartis.


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