Novo Nordisk (DK0060534915)- What now ?
When I looked at Novo Nordisk 3 months ago, I found the stock too expensive at 315 DKK/share. That was my summary back then:
What could make the stock interesting again ?
Well, that’s simple: Either a lower stock price or higher growth. Maybe management has low-balled growth ? Who knows. Maybe the market over reacts if the next quarters don’t look that good ? According to Bloomberg, analysts officially still expect double-digit earnings per share growth well into 2019. Even adjusting for share buy backs, this will be difficult to achieve based on the growth rates communicated by management.
For me, the stock would become more interesting at around 250 DKK under the current growth assumptions. I think I would also like to see more negative comments from analysts.
With the stock now trading at ~229 DKK, it is clearly necessary to revisit the stock again.
So let’s look what happened when they released Q3 numbers. The news which seemed to have spooked investors seems to have been this passage:
During 2016, the market environment in the USA has become significantly more challenging,negatively impacting future pricing for Novo Nordisk’s products.Consequently, the preliminary outlook for 2017 indicates low single-digit growth in sales and flat to low single-digit growth in operating profit, both measured in local currencies. In terms of long-term financial targets, Novo Nordisk no longer deems itachievable to reach the operating profit growth target of 10% set in February 2016. As a result, the target has been revised and Novo Nordisk is now aiming for anaverage operating profit growth of 5%. The two other financial targets remain unchanged.
This is now down from the 15% Operating profit growth target 2,5 years ago when Rob Vinall wrote about the company and slightly down from “5-8% operating profit growth” in the last quarter.
The first reaction would look like this: Wow, only a small reduction in growth leads to -30% in the stock price, now the stock must be a bargain.
In my old post, I calculated the expected yield based on this simple formula (“stolen” from Rob Vinall):
4,5% “Current” yield + 6,5% (mid-point) growth = 11% “expected yield”.
So let’s update this calculation at a current Price of 230 DKK and a P/E of 15:
6,7% “Current” yield + 5% (estimated) growth = 11,7% “expected yield”.
So we can clearly see that if one uses this kind of measurement, Novo Nordisk hasn’t become a lot cheaper as the drop in price more or less reflects the reduction in expected growth.
Personally, I think this is also one of the weaknesses of this approach where the “expected yield” for a stock is calculated as the inverse P/E (“earnings yield”) plus the assumed rate of growth. The sensitivity of the valuation to growth assumptions is enourmous.
In Novo’s example, the stock price would have needed to drop by ~25% to compensate for the 1,5% drop in growth in order to maintain the required yield. So the -30% drop is more or less 1:1. a decrease in value, assuming everything else stays the same.
Analyst ratings still quite positive
With a “stock market darling” like Novo Nordisk, it usually takes time until the overwhelmingly positive analysts change their opinion. Although the analysts have reduced their price targets from 400 DKK in summer, the current target with around 280 DKK is still significantly above the current market price.
Very few analysts have changed their conviction completely like the guy from Oddo who went from “neutral, 335 DKK price target” to “sell, 206 DKK price target”. The same guy had the stock as a buy and 450 DKK target by the end of 2015…..
So from a purely sentiment point of view, It doesn’t look like that analysts have given up on the stock.
Compared to other pharma stocks (P/E and EV/EBITDA), Novo trades now pretty “in line” with the other big players, but not at a discount.
When I looked at their presentation for Q3 I have to admit that I understand next to nothing about their business. What I found interesting was on page 27 that Eli Lilly seems to be gaining global market share at a very fast pace, whereas all the other players (including Novo) are stagnating.
Another aspect is the upcoming CEO change. I am not sure if the current reduction of the growth forecast is actually a kind of “kitchen sinking” for the new guy or if the new CEO will try to lower the threshold again.
Despite the signficant stock price drop, Novo Nordisk is not looking that much cheaper than 3 months ago because of the reduced growth outlook.
For me to invest, I think I would need to see much worse sentiment from analysts and significant position reductions of large shareholders which I haven’t seen yet. As I have next to no knowledge about the business, I would need a higher margin of safety than the current valuation. So no action.