At TTCM we have long been advocating the undervaluation that we see in the Swiss drug maker Novartis. The company is valued as though it has no growth prospects, but when you look at the pipeline, and the different components of the company, we believe that they have the ability to grow EPS by 7-10% including stock buybacks. The company has a 3% dividend which is likely to grow quite nicely and the stock trades around 10 times forward earnings.
We really like that Novartis owns the second largest generic drug manufacturer Sandoz, which will enable them to take advantage of this period in which so many blockbuster drugs are going off patent. The company paid a pretty high price for the remaining portion of Alcon that they didn’t own, but the division is likely to add significantly to the overall growth prospects of the firm. In the most recent issue of Barrons they attempted to look at Novartis through the net asset value of their individual components. Right now Novartis seems committed to remaining a conglomerate, but if the stock performance doesn’t improve, shareholder might pressure for a breakup which would make the below table much more significant. We like using an NAV (net asset value) approach to ensure ourselves of an adequate margin of safety, and we believe that due to the success that PFE, and ABT are having in spinning off various assets to increase shareholder value, that Novartis might be fairly quick to follow suit if the discount to intrinsic value persists for a longer period of time. While we are waiting we’d like to see as aggressive of a stock buyback program as possible to take advantage of the disconnect.