Novo Nordisk surges this year to a market cap equivalent to Danish GDP.
Positive news releases surrounding trials into disease prevention and weight loss medicine.
Bullish momentum remains strong, although book valuations don't leave much room for profits
Danish pharma Novo Nordisk has seen an astounding performance YTD, with the stock rising around 39% in 2023 alone, 17% of which came from a surge on the 8th of August where the company announced an incredible breakthrough in their trials to prevent major adverse cardiovascular events. But contrary to typical finance theory, this one way run of bullish price action has not been subject to higher volatility, with the weekly volatility average of 6% +/-, still below the industry average of 7.1%.
The surge in 2023 has given 0QIU a market cap equivalent to that of Denmark's GDP, and the second largest company in Europe, behind luxury goods company LVMH.
So, we have established Novo Nordisk is a giant, but what does the future look like through the investment lens? Is there still potential upside or have you missed the boat?
Technically
Starting by looking at the charts, we can see the clear uptrend that appears to be a one-way street with only brief periods of consolidation. From a technical standpoint, we have broken up and out of the most recent range with strong momentum suggesting pullbacks should be bought into, signalled by any relief in momentum by the stochastic indicators. Support at Kr1010 / Kr950 would be considered final points in the sand (-25 / -30%) for this strong bullish run to continue otherwise the market could be in for a prolonged period of consolidation / pullback. Given the distance of these key points, the risk reward ratio does not align well unless utilising hourly swing points which are typically less reliable. Weekly MACD's are 'signalling' a buy once again suggesting the bullish run is not finished and momentum remains strong.
Weekly Candlestick chart with MACD & Stochastics
Fundamentals
The spike on August 8th drove the PE ratio of Novo Nordisk to 35x, more than double the average of UK pharma's average of just 16x. This may install conviction for long term stability but does not provide value investors with anything of interest given the European industry average of just 23.6x.
The overall financial outlook for the company remains strong, beating industry averages at nearly every metric. The previous 12-month revenue has grown 33% compared to the industry of only 1.7% and the return on equity is 74.3% compared to the industry of just 4.8%.
This is all great news for investors who were involved in 2020, but does it offer promise for future returns?
There are only a couple of minor negatives worth noting; debt to equity ratio has risen quite significantly in the last 5 years from just 0.5% to over 28% currently. This has put their short-term liabilities some Kr19bn higher than their short-term assets.
The paper valuation as per Discounted Cash Flow (DCF) gives us a valuation of Kr1,485 per share, a 15% increase from current market prices. Considering the market often runs companies well over their DCF valuations, this would be considered a positive for future investment yields.
However, the PE ratio and enterprise value/EBITDA are already very high compared to their peers suggesting the company offers little in the way of value or a clever risk to reward for the time being.
Conclusion
Novo Nordisk (0QIU) appears to be on a strong bullish train which is well justified given their market and financial position. However, this type of market carries higher risk of pullbacks particularly when there is little ‘value’ left to be had, and the market price is similar to what the financial statement suggest. Investors should understand these risks before diving into such stocks blindly.
Strategy
Be aware of pullbacks below Kr1010, this could open the pathway for further downside. DCF valuations give a further 15% to the upside however all in all the risk reward does not favour new positions. Continue holding core positions long until clear downside momentum begins to take hold.
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