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Novo Nordisk (NYSE:NVO) has delivered a strong year-to-date performance of nearly 39%. This surge in share price represents an addition of over $30 billion in shareholder value and has been accompanied by strong fundamental development. Through this analysis, I present the case that further upside is entirely possible due to fundamental and technical factors within the security.

Strong Returns

Novo Nordisk has historically delivered very strong returns as measured by return on assets and return on equity. Return on assets is the net income of the firm divided by the average total assets over a time period and this key ratio measures the ability of the firm to utilize its assets to produce profits. Return on equity is the net income of the firm divided by directly-invested shareholder equity and this metric encapsulates the ability of management to prudently use investments to generate revenues. By using these two metrics in tandem, investors can better understand the performance of a firm in respect to its physical and financial capabilities. In the chart below, I have included 5 years of return on assets and return on equity for Novo Nordisk.

The history of returns is noteworthy in two ways. The first way in which Novo Nordisk's returns are noteworthy is the consistency of results. Over the past 5 years, Novo Nordisk has delivered better performance than the previous quarter in 95% of all quarters. What this essentially means is that on a quarter to quarter basis, Novo Nordisk is becoming progressively better at generating profits from its asset base and investments. These returns have translated into stock price appreciation in that over this same time period, shares increased around 170%. The second reason that these returns are noteworthy is the magnitude of the current level of returns. Novo Nordisk is a drug manufacturer and for its industry and size, it is the strongest performer on a return on equity basis. This can clearly be seen in the chart below.

Novo Nordisk's returns, when put into perspective of its competitors, highlight the strength of the organization. The average return on equity of all of Novo Nordisk's peers is an astounding -46%. Essentially, this means that on average, a firm within the drug manufacturing (category: other) industry, loses $46 dollars for every $100 invested in a given quarter. For further comparison, an average of only firms that make money within the industry yields an average return on equity of 38%. Novo Nordisk's return of 52% strongly outperforms even the profitable firms within the industry.

Robust Margins

With such strong returns in an industry in which the majority of firms are failing, Novo Nordisk is able to widen its competitive advantage. As firms fail or lose market share due to less efficient operations, Novo Nordisk has consistently grown its profit margin. Profit margin is a simple way of examining net income in perspective of the expenses required to generate profits. As profit margin increases, it means that the firm has been able to increase either its revenues or decrease its expenses. These changes can only result from an increase in firm efficiency or a decrease in competitor strength. The chart below shows 5 years of profit margin history for Novo Nordisk.

It can clearly be seen that Novo Nordisk is solidly profitable. Not only is the firm profitable, but it is increasing its ability to capture revenues as profit as time progresses. Over the past 5 years, profit margin has increased from below 10% to around 27%. This tangibly means that the firm has nearly tripled its ability to earn a profit from its revenue flow.

Novo Nordisk has proven its fundamental strength from a return on asset, return on equity, peer comparison, and profit margin standpoint. These returns are excellent, but where do we go from here? Are these returns indicative of future market performance? I believe so. As seen in the peer review, the average return within the industry is negative. Specifically, 47% of all peer firms in the industry are losing money on a quarterly basis. If these firms are unable to stem the attrition capital, they will eventually cease to be operating entities. As firms leave the industry, existing companies will capture a higher market share since the demand for this industry is fairly inelastic. It can be seen that Novo Nordisk enjoys healthy profit margins and it is my belief that due to the organization efficiency and returns previously explored, a larger market share will transcribe into higher profit margins. The market has proven for the past 5 years that it rewards increases in firm performance and I believe that Novo Nordisk has not only enhanced its performance, but also stands to further its strength in the future. Over the next few months, I believe that it is entirely possible that stock price continues to make new yearly highs.

Technically Speaking

Despite the fact that the fundamental and peer comparison factors seem to indicate that Novo Nordisk is a solid purchasing opportunity, we should not immediately buy the stock. It makes sense to wait until the market confirms our fundamental thesis in order to enjoy the highest probability trade. Novo Nordisk is currently slightly below yearly highs. I believe that if price is able to overcome the high of around $162.50 per share, then a purchase is warranted in the security. If price is unable to surpass this high and falls below $152 per share, then I believe that long positions should be exited since the technical definition of an uptrend will have been violated. These entry and exit points can be seen in the chart below.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Novo Nordisk: Buy A Peer-Beating Firm