Is It Too Late to Consider Novartis After Strong Multi Year Share Price Gains?

• If you are wondering whether Novartis is still attractively priced today, or if most of the upside has already gone to earlier investors, you are in the right place to unpack what the current market is really pricing in.
• Novartis has quietly been rewarding patient shareholders, with the stock up 1.7% over the last week, 5.6% over the past month, and 21.0% year to date, adding to a 28.2% gain over 1 year, 50.6% over 3 years, and 75.4% over 5 years.
• Those gains sit against a backdrop of ongoing portfolio simplification, a strategic focus on innovative medicines, and progress in its late-stage pipeline. These factors can lift investor confidence in future cash flows. At the same time, the broader healthcare and pharma space has seen renewed interest as some investors look for resilient, cash-generative businesses that may be better able to handle economic uncertainty.
• Despite that past share price performance, Novartis currently scores a 5/6 valuation check, suggesting the market may still be underappreciating parts of its story. Next, we will walk through different valuation approaches to see why that might be the case and introduce a more intuitive way to think about value that we will return to at the end.

Find out why Novartis's 28.2% return over the last year is lagging behind its peers.

Approach 1: Novartis Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model estimates what a company is worth by projecting the cash it can generate in the future and then discounting those cash flows back to today, to reflect risk and the time value of money.

For Novartis, the model starts from last twelve month free cash flow of about $18.2 billion and uses a 2 stage Free Cash Flow to Equity framework. Analysts provide detailed forecasts for the next several years, with free cash flow expected to grow into the mid to high teens of billions, before Simply Wall St extrapolates further out based on more conservative growth assumptions.

By 2035, Novartis free cash flow is projected at roughly $24.4 billion, with each future year discounted back to a present value. Summing these cash flows and adding a terminal value results in an estimated intrinsic value of around $276 per share.

Compared with the current market price, this DCF suggests the stock trades at about a 61.0% discount, implying that investors are paying substantially less than the modeled value of future cash generation.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Novartis is undervalued by 61.0%. Track this in your watchlist or portfolio, or discover 916 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Novartis.

Approach 2: Novartis Price vs Earnings

For profitable, established businesses like Novartis, the Price to Earnings ratio is a useful yardstick because it links what investors pay today to the profits the company is generating right now. In general, faster growth and lower perceived risk justify a higher PE, while slower growth or higher uncertainty should translate into a lower, more cautious multiple.

Novartis currently trades on a PE of about 18.1x, which is below both the Pharmaceuticals industry average of roughly 22.3x and the broader peer group sitting near 83.9x. Simply Wall St goes a step further by estimating a Fair Ratio of 32.1x for Novartis, which reflects a view of what investors might reasonably pay given its earnings growth profile, margins, industry positioning, market cap and risk characteristics.

This Fair Ratio is more informative than a simple comparison with peers, as it adjusts for company specific qualities instead of assuming all pharma names deserve the same multiple. With Novartis trading at 18.1x versus a Fair Ratio of 32.1x, the shares appear attractively priced on an earnings basis.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Novartis Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. This is a simple framework on Simply Wall St where you connect your view of Novartis pipeline strength, competition and pricing power to a specific forecast for future revenue, earnings and margins. That forecast then flows through to a fair value you can compare with today’s share price on the Community page used by millions of investors. Because Narratives are updated automatically as new earnings, news and clinical data arrive, a more optimistic investor might build a Narrative around accelerated adoption of advanced therapies, expanding US manufacturing and stronger margins that supports a fair value near the higher end of recent estimates. A more cautious investor might instead emphasise patent expiries, pricing pressure and pipeline risk to arrive at a fair value closer to the lower end. This side by side comparison of fair value versus current price helps you quickly decide how Novartis might fit into your own investment approach under each story.

Do you think there's more to the story for Novartis? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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