Probably the best stock I've seen all year.

Cash Source Summary

Their revenue has had a significant upwards trajectory growing 10%+ since FY21, with these trailing twelve months growing at ~17%. This growth is not there to a degree that is unsustainable, as 10%-30% growth can be achieved over time, and their proven track record is an even better sign of success. Their R&D expenses growth relative to their revenue growth is also right around 0, ±8% most of the time, and their revenue growth is outpaced by the R&D it is a great sign as their margins will continue to increase as the cost of revenue continue to decline, saving the company around 1.5 billion per year, while their R&D expenses increase it by about 1.2 billion. They also save a lot by spending less on Sales and Marketing, but this may be a poor business decision as competition in their weight loss businesses (Ozempic) increase, they need to captivate the attention of healthcare organizations and the consumers more. Their marketing strategy is very strong in this business, having emotionally targeted ads that focus on self help and self improvement, which have proven to be successful. Ozempic is also a drug that you take weekly, which leads to recurring revenue, and lesser marketing expenses growth will sustain the previous revenue, and it is still increasing, which means that they will still acquire more long term customers. Overall, their margins are growing at a great rate despite the increasing expenses in R&D, because of the lowered expenses in cost of revenue, and lowered sales and marketing expenses.

Margins

Their operating margins are growing at a good pace as shown in the financial model because of lowered CoR and S&M expenses, despite the rapid growth of the R&D expenses. Their gross margins are also growing a little bit, but this trailing twelve months have shown a large 10% increase in CoR relative to revenue growth, but this is likely a short term, one time event which will likely not repeat later. Their profit margin is a little less consistent, but is still right there around 31%-36%. Their operating margin though, is expected to grow over time, and will likely drive up profit margin with it in the future.

Balance Sheet

Their Debt/Equity (DTE) has been growing since FY 20, and since then till now it has more than 3x’ed, and their Debt/FCF has gone from 0.23 to 1.53, which is a multiple of ~6.7, which shows the company’s heavier reliance on debt and leverage. While this could lead to potential issues, their current and quick ratios have been declining. Their current ratio went from 0.94 in FY 20, to 0.78 this year. 

Strengths

1. High consistent growth over time

Their revenue growth since FY 20 averaged is 21.9%, and this is with low variance, and no outliers. This growth is high, and sustained which are signs of likely similar growth over the future, and consistent growth as well. 

1. Lowered expenses in CoR

While their CoR is still growing, if we exclude this year TTM, relative to revenue, their growth of CoR (cost of revenue) is -2%, which shows that they’re spending less and less on delivering products to their customers. This is especially good, as this is the one expense that should be reduced as much as possible, as it doesn’t help the future of the business like R&D and S&M. This is the expense, that is the biggest opportunity for companies to grow their operating margin, as lowered R&D and S&M will likely hurt the business in the future.

1. Smart use of debt

Novo Nordisk is acquiring more and more debt over time, which can serve as a powerful tool to push growth, and to help build more assets. They also aren’t just accumulating a large amount of liabilities without consideration, they are balancing it out with growing assets, which actually push their liabilities to asset ratios down, and they have been declining for the 5 years.

Risks

1. Lowered S&M expenses

One of the major reasons for the consistent increase in operating margin is because of the lowering of S&M expenses relative to their revenue growth. S&M as percent or revenue is decreasing, and while this is good for margins, this may not be ideal, as lowered marketing may lead to the growth of revenue being unsustainable over time.

1. Highly competitive sector

The drug manufacturing and development business is one with giants such as Eli Lilly, Pfizer, Moderna, and many more. The competitive nature of this business requires constant investment into R&D, and they need a strong economic moat to protect themselves. The moat is often in-built as the FDA approval process is long, and it can eliminate a large portion of the competition. 

1. Reliance on Liabilities

Novo Nordisk’s recent rising acquisition of liabilities, while it is a good thing, improving their ability to invest in further growth, it may backfire, as economic hardship could lead to needing to sell a large portion of their assets to repay these liabilities.

Outlook

Novo Nordisk is a strong company with large consistent revenue and operating income growth, their margins are projected to grow alongside their R&D expenses, which should yield returns. They are also taking on more liabilities, and balancing it out with more assets, overall, this company should grow at around a pace of 16%-25% per year.