To The Moon

$Novo-Nordisk A/S(NVO)$

Over the past 12 months, many companies have performed exceptionally well, which makes it unsurprising that, when evaluated on forward valuations, they appear quite expensive, especially given that they are trading well above their historical averages. Today, we’re going to focus on Novo Nordisk, a company that has faced a significant decline, down around 34% over the last year. Currently, its stock is at a new 52-week low and about 50% below its all-time high. The question is, is this company deeply undervalued, or is it a falling knife? We’ll explore that today.

It's also important to note that, despite this drop, over the last decade, Novo Nordisk has significantly outperformed the S&P 500, up around 239%. Both Wall Street and Seeking Alpha consider it a "buy." Additionally, the company pays a dividend of around 2%.

Now, let's delve into the factors behind the company's recent decline. In December, shares dropped about 20% after disappointing results from a clinical trial, particularly related to their popular obesity drug, Wegovy. This drug, which helps patients reduce their weight by 22.7%, was anticipated to achieve a 25% reduction, which led to the stock's sharp drop. Meanwhile, Eli Lilly saw their stock rise as their results outperformed expectations.

Earning Overview

Despite this setback, Novo Nordisk recently released their Q4 earnings, which showed strong performance. Shares saw a slight increase, driven by a profit beat and a remarkable 107% increase in Wegovy sales, surpassing expectations. Their bottom line also rose 29%, reaching $28 billion, which was higher than analysts had forecasted. The full-year bottom line grew by 21%, hitting $101 billion, again exceeding expectations.

Fundamental Analysis

Looking at the historical performance, Novo Nordisk has outperformed in three out of the last four quarters, with analysts expecting double-digit growth in each of the upcoming four quarters. Based on their December 2025 earnings per share, we believe the company is trading at an attractive valuation of 20.6. While the company does receive a "D" on its valuation grade, it’s not far from the sector median and significantly below its 5-year average, trading 35% lower than that average.

When we look at growth, Novo Nordisk stands out, with a B+ rating for growth, showing a 25% year-on-year increase, far better than the sector and its own 5-year average. Over the next 3 to 5 years, earnings per share are expected to grow by 24%, again significantly outperforming the sector's 11% growth and their own 5-year rate of 14.1%.

Profitability is another strong point for Novo Nordisk, with an A++ rating for a 85% bottom line, far better than the sector's 58% and above its 5-year average of 84%. Cash from operations was $17 billion, well ahead of the sector's performance. Although there’s a slight increase in cash burn, margins have been improving compared to historical figures.

From their recent investor presentation, we can see that their GLP-1 patient reach has nearly tripled, and their market share has grown from 58% to 63%, significantly ahead of Eli Lilly’s 34%. The diabetes market share has also increased by around 20%, a positive sign for their income stream.

Growth

Looking at the financial results over the past year, the company's top line has grown by 25%, while their gross margin increased slightly from 84.6% to 84.7%. Operating profit also rose by 25%, with the operating margin remaining stable. Net profit grew by 21%, with a slight increase in their net income margin, from 20.1% to 20.6%. Earnings per share (EPS) jumped 22%. These results reflect a high-quality company demonstrating double-digit growth across all key metrics.

Capital allocation is another area we emphasize when evaluating companies. It's important to assess how a company uses its capital, and in 2024, we saw significant dividend payouts. While there are no share buybacks planned for 2025, we believe that, given the current undervaluation of the stock, it would not be surprising to see a share buyback program introduced.

Looking ahead to 2025, the company expects double-digit growth, with top-line growth projected between 16% and 24%, and operating profit expected to grow between 19% and 27%.

Dividend

Now, let's focus on some key metrics that underscore the company's quality. The dividend safety score is a strong 99, indicating that the dividend is very safe and unlikely to be cut. In fact, during the last recession (2007-2009), the company increased its dividend while the S&P 500 saw a significant decline. Over the past 20 years, they've raised their dividend by 21% annually, earning them the title of a Dividend Aristocrat with 25+ years of increasing dividends.

In terms of valuation, we don’t look at any one model in isolation, and we’ll provide our own discounted cash flow (DCF) analysis. However, the current stock price sits well below the fair value indicated by valuation models, signaling significant undervaluation. The dividend yield also suggests this undervaluation, as it’s well above the 5-year average, and the forward P/E ratio of 20 is much lower than the 5-year average of 30.4.

Free Cash Flow

Another important point is free cash flow, which we focus on because earnings can sometimes be manipulated by management. A free cash flow payout ratio under 60% is ideal, and currently, it sits at 73%, though it's expected to decrease to 63% over the next year. Free cash flow has consistently grown since 2015 and is expected to continue rising.

Next, let’s examine cash flow. Cash from operations has been consistently high, increasing from $5.6 billion to $16.8 billion, a significant upward trend.

When comparing the company's performance to others in the sector, including major pharma names like Johnson & Johnson, Roche, AstraZeneca, and others, Novo Nordisk had the worst performance over the past year, down 33%. However, over the last five years, it’s reversed course and is up 173%, and over the past decade, it’s up 37%. It's important to note that past performance isn’t always an indicator of future results.

Market Sentiment

Sales growth is another positive sign. The company has experienced double-digit growth, with a 25% increase in the most recent year, and expects similar growth in the future. Over the last decade, they've nearly tripled their top line while also repurchasing more than 10% of their shares.

Finally, we look at the return on invested capital (ROIC), which stands at a strong 56% in 2024. Although it’s on a slight downward trend, this is still an impressive figure, as very few companies achieve these ROIC metrics.

Margins are equally impressive, with operating margins significantly exceeding minimum expectations. Efficiencies have improved over time, contributing to a solid free cash flow generation. The company also maintains a strong balance sheet, with a net debt-to-EBITDA ratio of just 0.5, indicating it would take less than a year to pay off its debt with its current cash reserves.

Overall, the company’s financials show strong growth, solid profitability, and a well-managed balance sheet, making it a very attractive investment opportunity.

Over the last decade, while there have been some years with flat performance, the company’s net income has more than tripled. Moving on to the balance sheet, as previously mentioned, it appears to be strong. A quick health check reveals that total cash has fluctuated, rising from $3 billion in 2015 to $3.7 billion in the latest earnings. However, it’s important to compare cash against total debt numerically and directionally, as a single number won’t provide the full picture. Debt has grown from $156 million to $14.3 billion over this period. Despite this, the net debt-to-EBITDA ratio remains well below one, highlighting a strong overall balance sheet.

Comparing Novo with S&P

Now, let’s compare Novo Nordisk to the S&P 500. Over the past year, the S&P outperformed, up 24%, while Novo was down 34%. However, looking over the past five years, Novo Nordisk has outperformed, and over the last decade, as mentioned earlier, it has massively outperformed, with a 304% increase. It’s crucial to have confidence in a company’s ability to outperform the S&P if you’re investing in individual stocks; otherwise, it may be better to invest in an index like the S&P.

Institutions Own

Turning to institutional activity, Novo Nordisk is 12% owned by institutions. There was selling of around $3.8 billion in 2024, but there was much more buying, with $5.64 billion in purchases. This bullish trend continued in the latest quarter, indicating strong institutional confidence. However, it’s always important to do your own research and not just follow institutional moves.

Valuation

Before we dive into our own valuation process, we want to remind you of our free weekly article that we release every Monday morning. This article highlights severely undervalued stocks, including Novo Nordisk, as well as insights into recent market trends. You can sign up to read the latest report, access 45 undervalued stocks for February, and grab a spreadsheet with 32 stocks that Wall Street believes have the most upside right now.

Regarding Novo Nordisk's valuation, our updated discounted cash flow (DCF) model suggests a target price of $101, indicating a 28% upside from the current price. We’ve based this on a 14% growth rate, which is more conservative than analyst projections of 16%. For those who prefer a more conservative approach, at a 12% growth rate, the target price is $87, indicating an 11% upside. For those more bullish, at a 16% growth rate, the target price increases to $116, representing a 47% upside.

We typically focus on the medium rate, which we estimate to be around $91 after applying a 10% margin of safety. Given the current trading price around $76, this represents a 25% margin of safety, with an upside of 40%. We believe this is a strong buy opportunity for a high-quality company with solid financials and a positive outlook.

Wall Street’s target for the next year is $110, suggesting a 40% upside. We consider this to be a major opportunity, although as always, we encourage you to do your own analysis. What are your thoughts? Is this a buy, hold, or sell for you? Don’t forget to sign up for our free weekly newsletter, grab those spreadsheets, and join us on Patreon for insights into our weekly buys and sells. With the volatility in recent weeks, we’ve made some purchases and sales, but we’ll continue to keep you updated.

Conclusion

In conclusion, despite the recent struggles, Novo Nordisk remains a strong company with substantial growth potential, making it an opportunity worth considering for a portfolio.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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