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Behind Novartis’s Valuation after 2Q17

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Aug. 30 2017, Published 1:54 p.m. ET

A look at Novartis’s valuation

Headquartered in Basel, Switzerland, Novartis AG (NVS) is a pharmaceuticals company involved in the research, development, manufacturing, and commercialization of pharmaceutical and healthcare products. For 2Q17, the company reported EPS (earnings per share) of $1.22 on revenues of $12.24 billion.

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Revenues and EPS

Novartis missed the Wall Street analysts’ estimate for 2Q17 revenues, reporting revenues of $12.24 billion, compared with the analysts’ estimate of $12.27 billion. However, Novartis surpassed estimates for EPS, reporting EPS of $1.22, compared with the estimate of $1.18.

Forward PE multiple

PE (price-to-earnings) multiples represent what one share can buy for an equity investor. On August 29, 2017, the company was trading at a forward PE multiple of ~16.5x. The industry currently trades at a forward PE multiple of ~15.4x.

Competitors Merck (MRK), Pfizer (PFE), and GlaxoSmithKline (GSK) have forward PE multiples of 15.5x, 12.5x, and 13.9x, respectively.

EV-to-EBITDA multiple

On a capital-structure-neutral basis, Novartis currently trades at ~15.7x, which is higher than the industry’s average of ~11.0x. Merck (MRK), Pfizer (PFE), and GlaxoSmithKline (GSK) have forward EV-to-EBITDA multiples of 11.6x, 10.2x, and 8.7x, respectively.

To divest company-specific risks, investors can consider ETFs like the Vanguard FTSE Developed Markets ETF (VEA), which has 1.0% of its total assets in Novartis (NVS). VEA also has 0.6% in Sanofi (SNY), 0.1% in Merck KGaA, and 0.2% in Teva Pharmaceuticals (TEVA).

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