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NVS and NVO: Which Has Higher Upside Potential?

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Valuation comparison

Novartis’s (NVS) EV (enterprise value) is $206.9 billion and its EV-to-revenue ratio is 4.1. The stock is trading at a forward PE (price-to-earnings) ratio of 13.3, and its PEG (price-to-earnings-to-growth) ratio is 2.2. At present, Novartis’ price-to-sales ratio is 3.6, and its price-to-book ratio is 2.4.

The company’s operating margin is 18.5%. Novartis has generated an ROA (return on assets) of 4.4% and an ROE (return on equity) of 10.3%. The company has a payout ratio of ~87%, meaning it distributes ~87% of its earnings as dividends to shareholders.

In comparison, Novo Nordisk’s (NVO) EV is $117.3 billion, and its EV-to-revenue ratio is 6.4. The stock trades at a forward PE ratio of 16.8, and its PEG ratio is 2.5. Novo Nordisk’s price-to-sales ratio is 6.2, and its price-to-book ratio is 14.0.

Novo Nordisk far outscores Novartis based on operating margins, ROA, and ROE. Novo Nordisk’s operating margin is at a healthy 44%. Its ROA is 30.7%, and its ROE is 80.2%, suggesting Novo Nordisk is making better use of shareholders’ capital to generate returns.

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Analysts’ recommendations

Of the four analysts covering Novartis in April, two recommended “buy” or a higher rating, one recommended “hold,” and one recommended “sell.” The stock’s mean rating is 2.5, and its target price is $92.67, implying an upside potential of 21.3%.

In comparison, the one analyst covering Novo Nordisk recommended “strong buy.” The stock’s target price of $60.40 implies an upside potential of 28.8% based on its current price of $46. In the next part of this series, we’ll compare Sanofi and GlaxoSmithKline.

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