Intrinsic value of Novartis ADR - NVS

Previous Close

$82.76

  Intrinsic Value

$35.73

stock screener

  Rating & Target

str. sell

-57%

  Value-price divergence*

-17%

Previous close

$82.76

 
Intrinsic value

$35.73

 
Up/down potential

-57%

 
Rating

str. sell

 
Value-price divergence*

-17%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of NVS stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 217.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -1.83
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  49,436
  50,425
  51,584
  52,910
  54,399
  56,048
  57,857
  59,828
  61,961
  64,259
  66,725
  69,363
  72,178
  75,175
  78,361
  81,741
  85,323
  89,115
  93,125
  97,362
  101,835
  106,556
  111,534
  116,781
  122,310
  128,132
  134,263
  140,716
  147,506
  154,650
  162,164
Variable operating expenses, $m
 
  19,200
  19,571
  19,994
  20,469
  20,996
  21,574
  22,203
  22,884
  23,618
  24,405
  22,150
  23,049
  24,006
  25,023
  26,103
  27,247
  28,457
  29,738
  31,091
  32,519
  34,027
  35,616
  37,292
  39,057
  40,917
  42,875
  44,935
  47,104
  49,385
  51,784
Fixed operating expenses, $m
 
  23,380
  23,965
  24,564
  25,178
  25,807
  26,453
  27,114
  27,792
  28,487
  29,199
  29,929
  30,677
  31,444
  32,230
  33,036
  33,862
  34,708
  35,576
  36,465
  37,377
  38,311
  39,269
  40,251
  41,257
  42,288
  43,346
  44,429
  45,540
  46,679
  47,846
Total operating expenses, $m
  41,161
  42,580
  43,536
  44,558
  45,647
  46,803
  48,027
  49,317
  50,676
  52,105
  53,604
  52,079
  53,726
  55,450
  57,253
  59,139
  61,109
  63,165
  65,314
  67,556
  69,896
  72,338
  74,885
  77,543
  80,314
  83,205
  86,221
  89,364
  92,644
  96,064
  99,630
Operating income, $m
  8,275
  7,844
  8,049
  8,352
  8,751
  9,244
  9,831
  10,511
  11,285
  12,154
  13,120
  17,284
  18,452
  19,726
  21,108
  22,603
  24,215
  25,950
  27,811
  29,806
  31,939
  34,218
  36,648
  39,238
  41,995
  44,927
  48,043
  51,351
  54,863
  58,587
  62,534
EBITDA, $m
  14,318
  14,697
  14,989
  15,391
  15,900
  16,516
  17,238
  18,064
  18,997
  20,037
  21,187
  22,450
  23,827
  25,324
  26,943
  28,690
  30,569
  32,586
  34,746
  37,056
  39,523
  42,153
  44,954
  47,935
  51,103
  54,469
  58,041
  61,830
  65,847
  70,103
  74,610
Interest expense (income), $m
  723
  626
  663
  704
  750
  802
  860
  924
  993
  1,068
  1,148
  1,235
  1,328
  1,426
  1,531
  1,643
  1,762
  1,888
  2,021
  2,161
  2,310
  2,467
  2,632
  2,807
  2,991
  3,185
  3,390
  3,605
  3,831
  4,069
  4,320
Earnings before tax, $m
  7,817
  7,218
  7,386
  7,649
  8,001
  8,442
  8,971
  9,587
  10,292
  11,086
  11,972
  16,049
  17,125
  18,299
  19,576
  20,960
  22,453
  24,062
  25,791
  27,645
  29,629
  31,751
  34,016
  36,431
  39,004
  41,742
  44,653
  47,747
  51,031
  54,517
  58,214
Tax expense, $m
  1,119
  1,949
  1,994
  2,065
  2,160
  2,279
  2,422
  2,588
  2,779
  2,993
  3,232
  4,333
  4,624
  4,941
  5,286
  5,659
  6,062
  6,497
  6,963
  7,464
  8,000
  8,573
  9,184
  9,836
  10,531
  11,270
  12,056
  12,892
  13,779
  14,720
  15,718
Net income, $m
  6,712
  5,269
  5,392
  5,583
  5,841
  6,163
  6,549
  6,999
  7,513
  8,093
  8,740
  11,716
  12,501
  13,358
  14,291
  15,300
  16,391
  17,565
  18,827
  20,181
  21,629
  23,178
  24,832
  26,595
  28,473
  30,471
  32,597
  34,855
  37,253
  39,798
  42,496

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  7,546
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  130,124
  125,123
  128,001
  131,291
  134,984
  139,076
  143,566
  148,456
  153,749
  159,450
  165,570
  172,116
  179,102
  186,539
  194,444
  202,832
  211,720
  221,129
  231,079
  241,593
  252,693
  264,407
  276,759
  289,779
  303,498
  317,946
  333,159
  349,171
  366,020
  383,747
  402,392
Adjusted assets (=assets-cash), $m
  122,578
  125,123
  128,001
  131,291
  134,984
  139,076
  143,566
  148,456
  153,749
  159,450
  165,570
  172,116
  179,102
  186,539
  194,444
  202,832
  211,720
  221,129
  231,079
  241,593
  252,693
  264,407
  276,759
  289,779
  303,498
  317,946
  333,159
  349,171
  366,020
  383,747
  402,392
Revenue / Adjusted assets
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
Average production assets, $m
  48,590
  49,567
  50,708
  52,011
  53,474
  55,095
  56,874
  58,811
  60,907
  63,166
  65,590
  68,184
  70,951
  73,897
  77,029
  80,352
  83,873
  87,600
  91,542
  95,707
  100,104
  104,744
  109,638
  114,796
  120,230
  125,954
  131,981
  138,324
  144,999
  152,021
  159,407
Working capital, $m
  2,722
  1,008
  1,032
  1,058
  1,088
  1,121
  1,157
  1,197
  1,239
  1,285
  1,334
  1,387
  1,444
  1,504
  1,567
  1,635
  1,706
  1,782
  1,863
  1,947
  2,037
  2,131
  2,231
  2,336
  2,446
  2,563
  2,685
  2,814
  2,950
  3,093
  3,243
Total debt, $m
  23,686
  18,944
  20,106
  21,436
  22,928
  24,581
  26,395
  28,370
  30,508
  32,812
  35,284
  37,929
  40,751
  43,756
  46,949
  50,338
  53,929
  57,730
  61,750
  65,998
  70,482
  75,214
  80,205
  85,465
  91,007
  96,844
  102,990
  109,459
  116,266
  123,428
  130,960
Total liabilities, $m
  55,292
  50,550
  51,712
  53,042
  54,534
  56,187
  58,001
  59,976
  62,114
  64,418
  66,890
  69,535
  72,357
  75,362
  78,555
  81,944
  85,535
  89,336
  93,356
  97,604
  102,088
  106,820
  111,811
  117,071
  122,613
  128,450
  134,596
  141,065
  147,872
  155,034
  162,566
Total equity, $m
  74,832
  74,574
  76,289
  78,249
  80,450
  82,890
  85,566
  88,480
  91,634
  95,032
  98,680
  102,581
  106,745
  111,177
  115,889
  120,888
  126,185
  131,793
  137,723
  143,989
  150,605
  157,586
  164,948
  172,708
  180,885
  189,496
  198,563
  208,106
  218,148
  228,713
  239,826
Total liabilities and equity, $m
  130,124
  125,124
  128,001
  131,291
  134,984
  139,077
  143,567
  148,456
  153,748
  159,450
  165,570
  172,116
  179,102
  186,539
  194,444
  202,832
  211,720
  221,129
  231,079
  241,593
  252,693
  264,406
  276,759
  289,779
  303,498
  317,946
  333,159
  349,171
  366,020
  383,747
  402,392
Debt-to-equity ratio
  0.317
  0.250
  0.260
  0.270
  0.280
  0.300
  0.310
  0.320
  0.330
  0.350
  0.360
  0.370
  0.380
  0.390
  0.410
  0.420
  0.430
  0.440
  0.450
  0.460
  0.470
  0.480
  0.490
  0.490
  0.500
  0.510
  0.520
  0.530
  0.530
  0.540
  0.550
Adjusted equity ratio
  0.595
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  6,712
  5,269
  5,392
  5,583
  5,841
  6,163
  6,549
  6,999
  7,513
  8,093
  8,740
  11,716
  12,501
  13,358
  14,291
  15,300
  16,391
  17,565
  18,827
  20,181
  21,629
  23,178
  24,832
  26,595
  28,473
  30,471
  32,597
  34,855
  37,253
  39,798
  42,496
Depreciation, amort., depletion, $m
  6,043
  6,853
  6,939
  7,038
  7,149
  7,272
  7,407
  7,553
  7,712
  7,883
  8,067
  5,165
  5,375
  5,598
  5,836
  6,087
  6,354
  6,636
  6,935
  7,251
  7,584
  7,935
  8,306
  8,697
  9,108
  9,542
  9,999
  10,479
  10,985
  11,517
  12,076
Funds from operations, $m
  7,970
  12,122
  12,331
  12,622
  12,990
  13,435
  13,955
  14,552
  15,225
  15,976
  16,807
  16,881
  17,876
  18,957
  20,126
  21,388
  22,745
  24,202
  25,762
  27,431
  29,213
  31,113
  33,137
  35,291
  37,581
  40,013
  42,595
  45,334
  48,238
  51,314
  54,573
Change in working capital, $m
  -3,505
  20
  23
  27
  30
  33
  36
  39
  43
  46
  49
  53
  56
  60
  64
  68
  72
  76
  80
  85
  89
  94
  100
  105
  111
  116
  123
  129
  136
  143
  150
Cash from operations, $m
  11,475
  12,102
  12,308
  12,595
  12,960
  13,402
  13,919
  14,512
  15,183
  15,930
  16,757
  16,829
  17,820
  18,897
  20,062
  21,320
  22,673
  24,126
  25,682
  27,346
  29,124
  31,019
  33,038
  35,186
  37,471
  39,897
  42,473
  45,205
  48,102
  51,171
  54,422
Maintenance CAPEX, $m
  0
  -3,681
  -3,755
  -3,841
  -3,940
  -4,051
  -4,174
  -4,309
  -4,455
  -4,614
  -4,785
  -4,969
  -5,165
  -5,375
  -5,598
  -5,836
  -6,087
  -6,354
  -6,636
  -6,935
  -7,251
  -7,584
  -7,935
  -8,306
  -8,697
  -9,108
  -9,542
  -9,999
  -10,479
  -10,985
  -11,517
New CAPEX, $m
  -2,879
  -977
  -1,140
  -1,303
  -1,463
  -1,621
  -1,779
  -1,937
  -2,097
  -2,259
  -2,424
  -2,593
  -2,767
  -2,946
  -3,131
  -3,323
  -3,521
  -3,727
  -3,942
  -4,165
  -4,397
  -4,640
  -4,893
  -5,158
  -5,435
  -5,724
  -6,026
  -6,343
  -6,675
  -7,022
  -7,386
Cash from investing activities, $m
  -3,441
  -4,658
  -4,895
  -5,144
  -5,403
  -5,672
  -5,953
  -6,246
  -6,552
  -6,873
  -7,209
  -7,562
  -7,932
  -8,321
  -8,729
  -9,159
  -9,608
  -10,081
  -10,578
  -11,100
  -11,648
  -12,224
  -12,828
  -13,464
  -14,132
  -14,832
  -15,568
  -16,342
  -17,154
  -18,007
  -18,903
Free cash flow, $m
  8,034
  7,444
  7,413
  7,451
  7,557
  7,729
  7,966
  8,267
  8,631
  9,057
  9,548
  9,266
  9,887
  10,575
  11,333
  12,162
  13,065
  14,044
  15,104
  16,246
  17,476
  18,795
  20,209
  21,722
  23,339
  25,065
  26,904
  28,863
  30,948
  33,164
  35,519
Issuance/(repayment) of debt, $m
  2,055
  1,047
  1,163
  1,329
  1,492
  1,653
  1,814
  1,975
  2,138
  2,304
  2,472
  2,645
  2,822
  3,005
  3,193
  3,389
  3,591
  3,801
  4,020
  4,247
  4,485
  4,732
  4,990
  5,260
  5,542
  5,837
  6,146
  6,469
  6,807
  7,161
  7,533
Issuance/(repurchase) of shares, $m
  -895
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  1,161
  1,047
  1,163
  1,329
  1,492
  1,653
  1,814
  1,975
  2,138
  2,304
  2,472
  2,645
  2,822
  3,005
  3,193
  3,389
  3,591
  3,801
  4,020
  4,247
  4,485
  4,732
  4,990
  5,260
  5,542
  5,837
  6,146
  6,469
  6,807
  7,161
  7,533
Total cash flow (excl. dividends), $m
  8,808
  8,491
  8,576
  8,780
  9,049
  9,383
  9,780
  10,242
  10,769
  11,361
  12,020
  11,911
  12,709
  13,580
  14,526
  15,550
  16,656
  17,846
  19,124
  20,494
  21,960
  23,527
  25,200
  26,983
  28,882
  30,902
  33,050
  35,332
  37,755
  40,326
  43,052
Retained Cash Flow (-), $m
  2,214
  -1,499
  -1,715
  -1,961
  -2,201
  -2,439
  -2,676
  -2,914
  -3,154
  -3,398
  -3,647
  -3,902
  -4,163
  -4,433
  -4,711
  -4,999
  -5,298
  -5,608
  -5,930
  -6,266
  -6,616
  -6,981
  -7,362
  -7,760
  -8,176
  -8,611
  -9,067
  -9,543
  -10,042
  -10,565
  -11,112
Prev. year cash balance distribution, $m
 
  1,757
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  8,749
  6,860
  6,819
  6,848
  6,944
  7,104
  7,328
  7,614
  7,963
  8,373
  8,009
  8,546
  9,147
  9,815
  10,551
  11,358
  12,238
  13,194
  14,228
  15,344
  16,546
  17,838
  19,223
  20,705
  22,291
  23,983
  25,789
  27,713
  29,761
  31,940
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  8,388
  6,280
  5,934
  5,638
  5,382
  5,156
  4,951
  4,759
  4,574
  4,390
  3,804
  3,647
  3,478
  3,295
  3,098
  2,886
  2,663
  2,430
  2,191
  1,950
  1,711
  1,480
  1,260
  1,055
  867
  700
  554
  429
  325
  240
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Novartis AG researches, develops, manufactures, and markets a range of healthcare products worldwide. It operates through three segments: Innovative Medicines, Sandoz, and Alcon. The Innovative Medicines segment offers patented prescription medicines to enhance health outcomes for patients and health-care providers. It franchises ophthalmology, neuroscience, immunology and dermatology, respiratory, cardio-metabolic, and other medicines, as well as cell and gene therapies. The Sandoz segment offers active ingredients and finished dosage forms of pharmaceuticals for dermatology, respiratory and ophthalmic, cardiovascular, metabolism, central nervous system, pain, gastrointestinal, and hormonal therapies; active pharmaceutical ingredients and intermediates primarily antibiotics; protein or other biotechnology-based products; and cytotoxic products for the hospital markets, as well as biotechnology manufacturing services to other companies. The Alcon segment offers eye care products, including ophthalmic surgical equipment, instruments, disposable products, and intraocular lenses for use in surgical procedures to treat cataracts, vitreoretinal conditions, glaucoma, and refractive errors; and contact lenses and lens care products. The company has collaboration and licensing agreements with Xencor for the development of bispecific antibodies for treating cancer; and with Surface Oncology to access four pre-clinical programs in immuno-oncology. It also has collaboration and licensing agreements with Intellia Therapeutics for the discovery and development of new medicines using CRISPR genome editing technology; and Caribou Biosciences for the development of drug discovery tools. The company was founded in 1895 and is headquartered in Basel, Switzerland.

FINANCIAL RATIOS  of  Novartis ADR (NVS)

Valuation Ratios
P/E Ratio 29.3
Price to Sales 4
Price to Book 2.6
Price to Tangible Book
Price to Cash Flow 17.1
Price to Free Cash Flow 22.9
Growth Rates
Sales Growth Rate -1.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -17.9%
Cap. Spend. - 3 Yr. Gr. Rate -3.1%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity 23.9%
Total Debt to Equity 31.7%
Interest Coverage 12
Management Effectiveness
Return On Assets 5.6%
Ret/ On Assets - 3 Yr. Avg. 9.5%
Return On Total Capital 6.8%
Ret/ On T. Cap. - 3 Yr. Avg. 12.2%
Return On Equity 8.8%
Return On Equity - 3 Yr. Avg. 15.7%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 64.9%
Gross Margin - 3 Yr. Avg. 66.2%
EBITDA Margin 29.5%
EBITDA Margin - 3 Yr. Avg. 30.2%
Operating Margin 16.7%
Oper. Margin - 3 Yr. Avg. 18.3%
Pre-Tax Margin 15.8%
Pre-Tax Margin - 3 Yr. Avg. 18.3%
Net Profit Margin 13.6%
Net Profit Margin - 3 Yr. Avg. 22.6%
Effective Tax Rate 14.3%
Eff/ Tax Rate - 3 Yr. Avg. 13.5%
Payout Ratio 96.5%

NVS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the NVS stock intrinsic value calculation we used $49436 million for the last fiscal year's total revenue generated by Novartis ADR. The default revenue input number comes from 2016 income statement of Novartis ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our NVS stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for NVS is calculated based on our internal credit rating of Novartis ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Novartis ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of NVS stock the variable cost ratio is equal to 38.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $22810 million in the base year in the intrinsic value calculation for NVS stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Novartis ADR.

Corporate tax rate of 27% is the nominal tax rate for Novartis ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the NVS stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for NVS are equal to 98.3%.

Life of production assets of 13.2 years is the average useful life of capital assets used in Novartis ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for NVS is equal to 2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $74832 million for Novartis ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 2631.98 million for Novartis ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Novartis ADR at the current share price and the inputted number of shares is $217.8 billion.

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▶ ETFs with exposure to Novartis AG : August 4, 2017   [Aug-03-17 08:56PM  Capital Cube]
▶ Moderna taps Novartis exec to lead manufacturing blitz   [08:30AM  American City Business Journals]
▶ Drugmakers Hunt for Patients in Indias Remote Corners   [Aug-02-17 12:00PM  Bloomberg]
▶ Pfizer on the Street: Inside the Analysts Recommendations   [Jul-28-17 09:06AM  Market Realist]
▶ Novartis in 2Q17: Performance of Alcon   [Jul-25-17 09:09AM  Market Realist]
▶ Novartis in 2Q17: Performance of Sandoz   [07:39AM  Market Realist]
▶ FDA Panel Votes To Approve CTL019, Positive Implications for CYRX   [Jul-19-17 01:30PM  Zacks Small Cap Research]
▶ Novartis beats 2Q profit forecasts   [Jul-18-17 04:47PM  Associated Press]
▶ These 2 Drug Giants In Buy Range Just Beat Earnings Views   [04:16PM  Investor's Business Daily]
▶ [$$] Novartis Quarterly Net Income Beats Expectations   [01:48PM  The Wall Street Journal]
▶ Novartiss 2Q17 Estimates: Innovative Medicines Segment   [Jul-17-17 01:35PM  Market Realist]
▶ Novartiss 2Q17 Earnings: Analyst Estimates   [10:27AM  Market Realist]
▶ Why You're Smart to Buy Vertex Pharmaceuticals Stock   [Jul-15-17 12:03PM  Motley Fool]
▶ [$$] Gormley's Take: Racing Against Time to Defeat Cancer   [07:30AM  The Wall Street Journal]
▶ FDA panel backs Novartis cancer drug   [06:49AM  CNBC Videos]
▶ [$$] The Price Dilemma Over a $16,000 Drug   [12:20AM  The Wall Street Journal]
▶ [$$] The Price Dilemma Over a $16,000 Drug   [05:44PM  The Wall Street Journal]
Stock chart of NVS Financial statements of NVS
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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