XLV - Novo Nordisk: Healthy Gains Ahead EPS Growth Seen Technical Strength

2023-11-25 01:43:31 ET

Summary

• Novo Nordisk has surpassed Nestle as the largest developed-market stock outside of the US, indicating the success of the GLP-1 drug segment.
• The company had a strong Q3 with a 29% YoY increase in revenue and raised its full-year outlook.
• Analysts expect significant earnings growth for Novo Nordisk in 2023 and beyond, and the stock is priced for strong growth ahead.
• I outline key price levels to monitor over the coming quarters.

Novo Nordisk (NVO) recently (and appropriately) supplanted sweet-maker Nestle (NSRGY) as the largest developed-market stock by market cap outside of the US. It's a clear sign that the GLP-1 drug segment is the real deal, and that reality is underscored by Eli Lilly's (LLY) market cap rising above half a trillion in the US. These two glamour names have sharply outperformed the global Health Care sector in 2023, and I see more gains ahead for Novo.

I reiterate my buy rating on NVO. I see fair value significantly above the current price while technical momentum is strong heading into 2024.

NVO: Most Valuable Ex-US Developed Market Company

According to Bank of America Global Research, Novo Nordisk is a Denmark-based world leader in insulin and diabetes care and manufactures and markets a variety of other pharmaceutical products. Key products include Wegovy and Semaglutide (GLP-1) and long-acting basal insulins. It operates in two segments: Diabetes and Obesity care and Rare Disease.

The Denmark-based $457 billion market cap Pharmaceuticals industry company within the Health Care sector trades at a high 38.8 forward non-GAAP price-to-earnings ratio and pays a small 0.9% forward dividend yield. Following earnings results posted a few weeks ago, the stock features a modest implied volatility percentage of 25%.

Earlier this month, Novo reported a very strong quarter. Q3 GAAP EPS (diluted) of DKK 5.00 was 58% higher than year-ago levels. Revenue jumped 29% YoY to DKK 58.7 billion, headlined by a 36% surge in sales from its Diabetes and Obesity care segment. Shares rose in the session following the quarterly results on the back of an upbeat outlook. The management team raised its full-year outlook , given the healthy Q3 performance figures. The firm now sees 32% to 38% top-line growth on a constant-currency basis, up from the previous range of 27% to 33%. Operating profits are forecast to jump 40% to 46% this FY.

Strong Sales Growth from Both Operating Units

Ozempic and Wegovy continue to drive massive sales and profit growth, but also keep your eye on what happens with CagriSema. The weight-loss drug showed significant aid in reducing blood sugar more than semaglutide alone in trials conducted earlier this year . CagriSema is currently being assessed for obesity (data expected in late 2024). Overall, its current drugs and dominance in the GLP-1 market are promising, while its medium-term pipeline appears robust.

On valuation , analysts at BofA see earnings having risen by nearly 50% in 2023 with out-year EPS expected to jump by another 24%. The current consensus outlook for non-GAAP EPS is a bit more than $3, but continued favorable sales results from its world-class diabetes and obesity medications could result in further EPS upgrades - a contributor to this favorable outlook is the possibility of so-called " bolt-on " deals, a strategy whereby Novo acquires more companies in early- to mid-stages of development. This will be a key activity to watch in 2024. What's more, Novo reports that obesity care sales grew by a strong 174% in the first nine months of 2023, mainly driven by the US market, so further massive gains are likely in store based on this trend.

BofA is considerably more upbeat on ADR USD EPS come 2024 and 2025 (though BofA assumes reported, not operating EPS figures in the graphic below). Dividends, per BofA's outlook, are expected to rise over the coming quarters. I see the payout increase as quite likely given the firm's rising dividend history and robust free cash flow, as evidenced in the table of data and forecasts below. Seeking Alpha's data show a stellar 26.9% 1-year dividend growth rate for the firm, and with very strong profits and cash flow in recent quarters, I assert this trend will persist. Novo has grown its dividend since 2019 according to Seeking Alpha and the company reports that operating profit growth is expected to be in the 40% to 46% range for FY 2023 with DKK 65 to 73 billion of free cash flow, up from its estimate in August. As part of its Strategic Aspirations 2025, the management team seeks to "deliver free cash flow to enable attractive allocation to shareholders."

What's particularly encouraging for investors in Novo is that Wegovy was shown to provide other health benefits, too. The trial results from last August revealed "that patients on Wegovy had a 20% lower incidence of heart attack, stroke or death from heart disease compared to those on a placebo. That is significantly better than the 15-17% expected by investors and analysts."

Also making news over the US holiday, the Denmark company said it will invest more than DKK 16 billion in its French production site to meet what is intense demand for its obesity and diabetes treatments. Couple that with high demand out of Japan that may develop in February next year, and the growth outlook for Wegovy in particular should be robust.

Novo Nordisk: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

NVO: 40x Earnings

If we assume 20% long-term earnings growth and a PEG ratio of two, then a 40x P/E is warranted. Assuming $3.30 of next 12-month EPS, then shares should trade near $132, making the stock undervalued today. The stock is no doubt priced for growth given lofty EV/EBITDA ratios and mid-teens price-to-sales multiples, though its forward P/S is actually significantly below its 5-year average. Its premium valuation is warranted, in my view, given the company's stage in the growth cycle. For comparison, LLY trades at 48x 2024 earnings, per Seeking Alpha, and it has slightly lower expected sales growth according to consensus data. Considering that the Health Care sector's PEG ratio is 2.0, I assert the 40x earnings multiple for NVO is appropriate today. Massive sales gains and market penetration factors mentioned earlier are the basis for such a high valuation bar.

NVO: Priced For Strong Growth Ahead

Compared to its peers, NVO features robust growth and profitability ratings, though its valuation is priced for a premium industry position in the out years. Still, strong sales from its key products have resulted in significantly higher EPS revisions from global analysts and share-price momentum is stellar compared to the broader Health Care sector.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q4 2023 earnings date of Wednesday, January 31, BMO. Before that, the management team is slated to present at the Berenberg European Conference (Pennyhill) 2023 from December 4 to December 7 in London. Any updates on Wegovy, Ozempic, or Cagrisema could result in share price volatility. Such volatility could stem from poor-than-expected sales trajectories in those key drugs as well as any possible litigation risks. Another key risk is how competition evolves, particularly from LLY's Mounjaro and Zepbound. Finally, Pfizer's ( PFE ) experimental obesity pill, Danuglipron, could be another competing drug in the space. The twice-daily medication is expected to have phase two trial data out early next year .

Corporate Event Risk Calendar

The Technical Take

With significant bottom-line growth expected and somewhat priced into the valuation, the chart is nearly all systems go. Notice in the graph below that shares have been trending higher in a tight channel for the last 14 months, rising from under $50 to above $100. With a positively sloped long-term 200-day moving average, the bulls are in control. Moreover, I spot key support in the $86 to $87 range - that was previous resistance from Q2 before the big August gap higher that corresponded to favorable news regarding Wegovy's efficacy. Of course, from a technical point of view, we only care about price trends, not the fundamental case.

Also, take a look at the volume spikes seen since early August. There's clearly accumulation going on with NVO. The only major sign of caution I see is a bearish RSI divergence at the top of the chart - as price has consolidated under the $103 to $104 area, momentum trends have turned weaker. That leads me to think that a pullback to the mid-$90s could occur - that is where the 50dma comes into play, and we have seen a series of higher lows since early October.

Overall, NVO's momentum appears strong and the technical uptrend is intact. Resistance is seen at $104, and buying on weakness into the mid-$90s could work.

NVO: Bullish Uptrend, $104 Near-Term Resistance, $86 Support

The Bottom Line

I reiterate my buying rating on Novo Nordisk. Even after a stunning rally since early Q4 last year, massive EPS growth and favorable forecasts result in a still-fair GARP valuation.

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