Diversified Investment Appeal From Novartis

By Ryan C. Fuhrmann | January 27, 2012 AAA

Diversified healthcare giant Novartis (NYSE:NVS) reported impressive 2011 results in January 2012. These strong trends are not projected to carry over into 2012 or subsequent years, but the stock does offer a compelling mix of a reasonable valuation, high dividend yield and respectable operational growth across appealing healthcare areas.

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Full-Year Recap
Total sales jumped 16% to $58.6 billion, with four percentage points coming from positive currency fluctuations. The pharmaceutical division, which competes with pure play rivals including GlaxoSmithKline (NYSE:GSK) and Merck (NYSE:MRK), sells blockbuster drugs, including blood pressure drug Diovan and cancer treatment drug Gleevec, accounted for 56% of total sales and reported solid growth of 7%. Ophthalmology unit Alcon weighed in at 17% of total sales and reported 10% organic growth.

The other major segment is generic drug manufacturer Sandoz that competes with the likes of Teva Pharmaceutical (Nasdaq:TEVA) and Dr. Reddy's Laboratories (NYSE:RDY). Sandoz grew 10% to account for 16% of total sales. Smaller units include vaccines and diagnostics as well as consumer and animal health, which accounted for 3% and 8% of sales and growth of -32% (last year saw a one-off jump in pandemic flu vaccine sales) and 6%, respectively.

Operating income fell 5% to $11 billion, but still represented an impressive operating margin of nearly 19%. Additionally, management's estimate of "core," or operating earnings, was $15.9 billion and 14% ahead of 2011 levels. Similarly, reported net income fell 11% to $9.2 million but grew 12% to $13.5 billion, or $5.57 per share when stripping out items the company deemed to be nonrecurring. It also estimated free cash flow at $12.5 billion, or 1% ahead of last year. (To know more about income statements, read Understanding The Income Statement.)

Outlook
Following the strong 2011 results and the loss of patent protection for Diovan, Novartis expects much more modest trends in 2012. It expects flattish sales and a slight decline in operating income. Analysts are currently modeling sales growth of less than 2%, total sales of just below $60 billion and earnings per share of $5.63 for modest profit growth of roughly 1.1%.

The Bottom Line
At a forward P/E of around 10, an investment in Novartis offers a combination of a reasonable valuation, solid income with a current dividend yield of 3.6% and respectable operational growth that should come in in the mid to high single digits over the next three to five years. Of course, many players in the pharmaceutical space offer similar investment appeal, but Novartis stands out for a more diversified business model that adds generics, vaccines for downside protection and faster growing ophthalmologic exposure. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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