TBR: Novo Nordisk

Business Description

NNL1“Novo Nordisk A/S is a healthcare company. The Company is engaged in the discovery, development, manufacturing and marketing of pharmaceutical products. It is engaged in diabetes care. It has a range of diabetes product portfolio, including a portfolio of modern insulins and the first human once-daily GLP-1 analog. In addition, it has is engaged in areas, such as haemophilia, growth hormone therapy and hormone replacement therapy. It manufactures and markets pharmaceutical products and services to patients, the medical profession and society. The Company operates in two segments: diabetes care and biopharmaceuticals. In February 2014, Innate Pharma has acquired full development and commercialization rights to the anti-NKG2A antibody, a immune checkpoint inhibitor ready for Phase II development in oncology from Novo Nordisk.” (Source: Google Finance)

Earning Power

Diluted earnings per share (adjusted for share-splits) was 9.35 DKK in 2013, compared to 1.48 DKK in 2004, a compounded growth rate (CAGR) of 22.7%.

2004 2005 2006 2007 2008
EPS, diluted* 1.48 1.78 2.00 2.68 3.11
2009 2010 2011 2012 2013
EPS, diluted* 3.56 4.92 6.00 7.77 9.35

Diluted free cash flow per share (adjusted for share-splits) was 8.25 DKK in 2013, compared to 1.19 DKK in 2004, a compounded growth rate (CAGR) of 24.0%.

2004 2005 2006 2007 2008
FCF, diluted 1.19 1.41 1.34 2.39 3.28
2009 2010 2011 2012 2013
FCF, diluted 3.98 5.32 6.21 6.67 8.28

Cash conversion, i.e., free cash flow to net income, was 96% in average during the last ten years (See Key Metrics table below).

Key Financial Metrics

Both gross profit margin and operating profit margin have increased during the last ten years. In fiscal year 2013 gross profit margin was 83.1% and operating profit margin was 37.7%.

Free cash flow margin was 26.7% in 2013, compared to a ten-year average of 20.5%.

Operating efficiency has improved continuously and SG&A expense as a percentage of sales has decreased. At the same time PP&E turnover has also improved, and contributed to the rise in return on invested capital to 83.5% in 2013. Invested capital turnover was 2.21 in fiscal year 2013, compared to the ten-year average of 1.66. Capital expenditures as a percentage of sales and operating cash flow decreased and came in at 3.9% and 12.5% respectively in 2013.

Total payout, i.e., dividend per share plus share buybacks per share, has increased and in 2013 all of net income was distributed to shareholders.

To sum up, we see high margins and returns that have improved during the last ten years.

Key Metrics FY13 3y Avg. 5y Avg. 7y Avg. 10y Avg.
Gross Profit, % 83.1% 82.3% 81.4% 80.2% 78.2%
EBIT, % 37.7% 35.9% 33.2% 30.5% 28.1%
Invested Capital, turns 2.21 2.17 2.02 1.86 1.66
ROC, % 83.5% 78.0% 67.8% 58.3% 48.9%
FCF-margin, % 26.7% 25.6% 25.2% 23.8% 20.5%
ROE, % 59.1% 51.5% 44.2% 39.2% 33.3%
Total Payout*, % 1.04 1.02 0.99 0.93 0.85
PP&E, turns 3.82 3.54 3.25 2.97 2.61
S&D to Sales, % 28.0% 28.1% 28.9% 28.9% 28.9%
Admin. to Sales, % 4.2% 4.4% 4.8% 5.1% 5.5%
R&D to Sales, % 14.0% 14.2% 14.7% 15.9% 15.8%
Capex to Sales,% 3.9% 4.3% 4.7% 4.7% 6.3%
Capex to OCF, % 12.5% 14.1% 15.4% 16.4% 23.9%
FCF/EPS, % 0.89 0.95 1.02 1.02 0.96

*Total Payout, % = (Dividend per Share + Share Buybacks per Share) / Net Income

Return on Capital & Earnings Yield

Below is a breakdown and calculation of return on capital and the earnings yield.

Amounts in DKK millions.
Novo Nordisk (CPH:NOVO-B)
2013 TTM
Return on Capital 83.5% 108.0%
EBIT 31.493 32.112
Net Fixed Assets 21.882 22.168
Net Working Capital 15.853 7.565
Current Assets 42.058 34.215
Current Liabilities 15.915 23.748
Excess Cash (>5%) 10.290 2.902
Drivers of Return on Capital
EBIT-margin, % 37.7% 38.1%
× Invested Capital, turns 2.21 2.83
= Return on Capital 83.5% 108.0%
Earnings Yield 5.6% 5.8%
EBIT 31.493 32.112
Enterprise Value 558.343 550.458
   Market Capitalization 547.150 547.150
   Debt 903 406
   Excess Cash 10.290 2.902

Valuation

TTM earnings per share came in at around 9.70 DKK. In the table below an earning power of 9.50 DKK per share has been used when calculating a value per share at different earnings multipliers.

See table below for yields at different earnings and free cash flow figures.

Valuation FY13 3y Avg. 5y Avg. 7y Avg. 10y Avg.
EPS, diluted 9.35 7.71 6.32 5.34 4.27
Earnings Yield, % 3.6% 3.0% 2.4% 2.1% 1.6%
FCF, diluted 8.28 7.05 6.09 5.16 4.01
FCF Yield, % 3.2% 2.7% 2.4% 2.0% 1.5%

Earnings power in relation to tangible book value is high, 9.5 to 13. Using tangible book value per share of 13 DKK per share as a floor and the 25 times earnings of 238 DKK per share as the higher end of the value range, we see that this range is below the current share price of 259 DKK. At the moment, without further research, Novo Nordisk seems to be fairly priced in relation to its intrinsic value.

Value Range Earnings Multipliers
Earning Power 9.5 20x 25x
Intrinsic Value 190 238
Tangible Book Value per Share 13
Value Range 13<>238
Price per Share 259
Margin of Safety -8.3%

Financial data from company financial reports.

Novo Nordisk will be added to the watch list.

Also, further research will be performed about the business and the industry in which it operates.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.

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