Investors looking to strike while the iron is hot can buy beaten-down stocks that appear to have excellent chances of bouncing back. And that describes shares of Novo Nordisk (NVO -1.41%) very well.
The pharmaceutical leader is down by 52% over the trailing-12-month period as of July 17, but initiating a position now could double investors' money in six years or so. Here's why this stock is a screaming buy at its current levels.
Novo Nordisk's recent challenges
Novo Nordisk focuses on developing diabetes treatments, an area where it has been a leader for many decades. As of February, it held a 33.3% market share for diabetes drugs.
This sort of long-term dominance doesn't happen by accident. The company has consistently attracted top talent in the pharmaceutical industry, which, combined with its extensive experience in diabetes, has enabled it to break new ground repeatedly.
Image source: Getty Images.
Why, then, have the company's shares dropped by 52% over the past year? Because Novo Nordisk failed to impress the market with its financial results and clinical progress. The developments that led to the drugmaker's share plunge would have been excellent for almost any other pharmaceutical company, but investors held it to a higher standard given its rich valuation metrics.
For instance, the company reported phase 3 results for CagriSema, an investigational weight management medicine, that proved it's more effective than its famous semaglutide (Wegovy), reducing patients' weight by an average of 22.7% in 68 weeks.
However, management was looking for a 25% figure in the study. Very few anti-obesity therapies in development have achieved results comparable to CagriSema, but that was not enough to please investors.
NYSE: NVO
Key Data Points
The good news: Novo Nordisk's pipeline in diabetes and the fast-growing area of weight management remains robust. The company has several promising candidates in development, including Amycretin, for which it recently initiated late-stage studies.
And management has significantly expanded its pipeline through acquisitions. Even with mounting competition, the company should continue to be one of the leaders in its core areas of focus.
It's been developing medicines in other fields as well, including various rare diseases (such as the blood disorders beta thalassemia and sickle cell disease), neurological disorders (including Alzheimer's and Parkinson's), and others. Making progress in diabetes and obesity while diversifying its lineup should work wonders for Novo Nordisk down the line.
The price is right
Net sales in the first quarter grew by 19% year over year to 78.1 billion Danish krone ($12.1 billion). The company's net profit was up 14% year over year to $4.5 billion. These would be excellent results for most similarly sized drugmakers, yet Wall Street remains unimpressed. In my view, that has created a wonderful opportunity to buy shares on the dip.
The company's forward price-to-earnings ratio (P/E) has declined significantly over the past year and now stands at 16.9, barely above the healthcare industry's 16.2 and lower than the S&P 500's 22.3.
But given Novo Nordisk's still excellent position in its core markets of diabetes and obesity treatments -- the latter of which should grow rapidly in the coming years -- and the company's better-than-average revenue and earnings growth, its stock is arguably worth a steeper premium. In fact, the forward P/E is about as low as it has been in over two years.
NVO PE Ratio (Forward) data by YCharts.
At current levels, shares look like a steal. Here is how things could evolve for the company in the next six years. First, it could make significant clinical and regulatory progress and launch at least one -- if not several -- blockbuster weight loss or diabetes medications.
Second, the company should continue recording strong results, with revenue and earnings moving in the right direction. Lastly, it looks likely to continue increasing its dividend, which it has done significantly over the past half-decade.
The stock needs a compound annual growth rate of 12.2% to double in the next six years. Novo Nordisk can pull it off, especially for those who opt to reinvest the dividend.
