Novo Nordisk (NYSE:NVO) Presents a Compelling Case for Value Investors

The search for undervalued companies with solid basic business foundations is a key part of value investing. This strategy involves finding stocks trading for less than their intrinsic value, often by using a disciplined screening process. One such method is the "Decent Value" screen, which selects for companies with a good valuation rating, suggesting they may be priced low compared to their competitors or their own financial numbers, while also holding acceptable scores in profitability, financial health, and growth. This multi-part method helps to avoid "value traps", stocks that seem inexpensive for a reason, and instead finds companies that are possibly undervalued by the market in spite of their operational soundness. A security that recently appeared through this screening process is NOVO-NORDISK A/S-SPONS ADR (NYSE:NVO).

Valuation Metrics

The main attraction for a value investor is a stock's valuation, and this is where Novo Nordisk is notable. The company's valuation rating of 7 out of 10 implies it is trading at a good price relative to its financial performance and future earnings potential. For an investor looking for a margin of safety, a buffer between the market price and the calculated intrinsic value, these numbers are important.

• Price-to-Earnings (P/E) Ratio: At 12.46, NVO's P/E ratio is much lower than the industry average of 27.47 and the S&P 500 average of 25.65. This shows investors are paying less for each dollar of earnings compared to many of its pharmaceutical counterparts.
• Forward P/E Ratio: The forward P/E of 11.34 is even more attractive, trading at a discount to 85% of the industry and well under the wider market, implying the valuation stays good based on future earnings estimates.
• Enterprise Value to EBITDA & Price/Free Cash Flow: The company also does well on other valuation measures, being less expensive than over 90% of its industry based on Enterprise Value/EBITDA and less expensive than 83% based on Price/Free Cash Flow, indicating strong cash generation relative to its market price.

Profitability Strength

A low valuation is not meaningful if the company is not making profits. Value investors look for financially sound businesses, and Novo Nordisk's profitability rating of 9 out of 10 is very good. High profitability not only offers a safety cushion but also points to a company with a lasting competitive edge, a key concept in value investing.

• Return Metrics: The company shows excellent returns on capital, with a Return on Invested Capital (ROIC) of 38.03% and a Return on Equity of 61.08%, putting it in the best group of its industry. This indicates very efficient use of shareholder capital.
• Margins: Novo Nordisk functions with notable margins, including a Profit Margin of 32.88% and an Operating Margin of 42.03%, which have gotten better in recent years. These numbers are some of the best in the pharmaceuticals sector and suggest strong pricing ability and cost management.

Financial Health Assessment

Even if a company is profitable, its financial stability is essential. Novo Nordisk's health rating of 6 out of 10 points to a mostly solid but not perfect financial standing. A value investor needs to examine balance sheet strength to evaluate the risk of permanent capital loss.

• Solvency: The company scores high on solvency, with an Altman-Z score of 4.08 showing no near-term bankruptcy risk. Its Debt-to-Free-Cash-Flow ratio of 1.66 is very good, meaning it could repay all its debt in less than two years with its current cash flow.
• Liquidity Concerns: The analysis does note some liquidity questions, with a Current Ratio and Quick Ratio under 1.0, which is lower than most industry counterparts. However, the report states that considering the company's very good profitability and solvency, these ratios might not signal immediate liquidity problems and should be viewed in light of its particular business model.

Growth and Dividend Profile

Value investing is not only about current numbers, it also includes a perspective on a company's future. Novo Nordisk's growth rating of 5 out of 10 shows a steady, if not rapid, growth path. Also, its dividend rating of 7 out of 10 includes an income part, which can be a meaningful portion of total returns for a patient investor.

• Historical Growth: The company has shown good revenue growth of 16.64% over the last year and an average of 18.94% over recent years. Earnings per share growth has also been positive.
• Future Outlook and Dividend: While future growth is predicted to slow, it stays positive. The company provides a dividend yield of 3.71%, which is good compared to the S&P 500 average, and it has a consistent history of increasing its dividend for many years.

A complete view of Novo Nordisk's fundamental analysis, including specific details of each rating category, is provided in the full fundamental report.

Conclusion

NOVO-NORDISK A/S-SPONS ADR (NVO) offers a strong case for investors using a value-based approach. The stock appears undervalued on several important measures while being supported by a business that displays first-rate profitability, a mostly healthy balance sheet, and a good growth and dividend history. This mix fits with the value investing idea of seeking a margin of safety, buying a high-quality asset at a price that seems to be below its intrinsic value. While investors should be aware of the mentioned liquidity numbers and slowing growth forecasts, the overall fundamental view suggests a company that is financially sound and possibly incorrectly priced by the market.

For investors wanting to find other companies that match a similar description, the Decent Value Stocks screen can be used to find more options.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The content presented is based on data believed to be reliable but its accuracy cannot be guaranteed. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.