Analyzing the Changes in Novartis’s Valuation for 1Q16
Novartis's 1Q16 Earnings Got a Neutral Response from Investors
Valuation multiples
We think that the forward PE (price-to-earnings) and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples are the two best valuation multiples to use when valuing Novartis (NVS) and other large pharmaceutical companies—given the relatively stable and visible nature of their earnings. PE multiples are widely available and represent what one share can buy for an equity investor. EV-to-EBITDA multiples are capital structure neutral.
Forward PE multiple
On April 23, 2016, the company was trading at a forward PE multiple of ~15.4x. Based on the multiple range in the last five years, Novartis’s current valuation isn’t high or low. Over the past five years, Novartis’s PE multiple has been ~9x–20x.
Novartis’s valuation multiple followed the industry’s trend over the last five years. Whether the healthcare sector’s forward PE multiple rises or falls, Novartis will definitely be impacted. Currently, the industry trades at a forward PE multiple of ~16.8x. Other competitors such as Sanofi (SNY), AstraZeneca (AZN), and GlaxoSmithKline (GSK) have forward PE multiples of 14.0x, 14.9x, and 17.0x, respectively.
EV-to-EBITDA
On a capital structure neutral basis, Novartis trades at ~15.6x. This is much higher than the industry’s average of ~11.5x. Other competitors such as Sanofi (SNY), AstraZeneca (AZN), and GlaxoSmithKline (GSK) have forward EV-to-EBITDA multiples of 10.1x, 9.9x, and 10.7x, respectively.
The above multiples represent an improvement in estimates and valuations for Novartis. It’s a positive sign for investors. Investors can consider ETFs like the First Trust Value Line Dividend ETF (FVD) in order to divest the risk. FVD holds ~0.5% of its total assets in Novartis. The SPDR S&P International Health Care Sector ETF (IRY) holds ~11.1% of its total assets in Novartis.
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