As part of diversifying my portfolio last year I was looking for a good pharmaceutical company. As a more value oriented investor, I typically don't look at higher growth companies that frequently. However sometimes I do invest in "GARP" stocks - (Growth at a Reasonable Price), if I think that the long term business prospects are compelling and the market doesn't seem to be taking this fully into account in the valuation.
This is where I stumbled across Novo Nordisk A/S (NYSE:NVO).
Novo Nordisk is a Danish company which sells its drugs worldwide. The company has 2 primary segments: Diabetes Care and Biopharmaceuticals, and it is best known as the leading company in providing insulin medications for diabetics. In the diabetes industry the company's main competitors are Eli Lilly (NYSE:LLY) and Sanofi (NYSE:SNY) and to a lesser extent Pfizer (NYSE:PFE).
Here are five reasons why I think Novo Nordisk is a great company to keep on your watchlist:
- Growth in Worldwide Obesity- As sad as it may be, the world's population is definitely getting more obese at an alarming rate. The trend started in America decades ago, and it is now being seen full force in emerging markets such as China and India. In these countries as more and more people join the middle class and eat more fast food and other junk foods, there is an alarming rate of increase in type II diabetes. The World Health Organization has released numerous reports on this trend over the past few years. As stated in this article, in 2005 there were 171 million people worldwide with the disease, and this number was expected to at least double by 2030. This in turn means there will be a huge rise in the need for insulin drugs. Indeed, between 2012 and 2018 the worldwide market is expected to grow at 7.9% annually. From an investment perspective, Novo Nordisk is best positioned to profit from this trend. The company produces the world's leading insulin drugs, and has a dominant market share. In 2009 the company had about 40% of the world market share for modern insulin. In some emerging markets like China where the rate of insulin use is growing at more than 20% annually, Novo has a market share as high as 63%.
- Shareholder Friendly - The company currently pays a dividend of 1.2%. The ten year dividend growth rate is 22%, and there has been 15 consecutive years of dividend increases. The company has also reduced the outstanding share count by about 20% over the past 10 years.
- Excellent Balance Sheet - The company has a debt/equity ratio of only 0.028, and currently has more than $2B in cash.
- Company is Well Managed - Novo has very impressive ROA, ROI, and ROE ratios compared to its industry peers. The five year averages are 22%, 30%, and 35% respectively. These are more than double industry averages.
- Predictable Earnings - Insulin for those who need it is not a luxury item; it is a necessity. This translates into solid earnings year after year for Novo, even during economic recessions. Earnings per share have increased every year over the past 10, rising an average of 17% per annum.
For those looking to add exposure to the pharmaceutical industry, as well as growth in emerging markets Novo Nordisk is definitely a company I recommend looking at. I would, however, take a close look at the valuation before buying in. As an investor more focused on value than growth, I am always mindful of the price I'm willing to pay for a company, even one that seemingly has great prospects and is well run such as Novo.
The company is currently quite pricey with a trailing P/E over 27, and a PEG ratio of 1.47. EV/EBITDA is over 17, which is higher than I normally will pay, even when growth prospects are very good. The shares have run up about 50% in the past year as well. I have owned the company myself for about 1 year, and with the company seemingly close to fair value by most valuation metrics and basic DCF methods, I will take some profits off the table in the near future. However, with any pullback to the range of say $120/share, then I would definitely recommend the company as a strong buy and hold for the long term.