Waiting For Growth, Or A Better Valuation, Argus Stays Sidelined On Novartis Shares

Argus maintained its Hold rating on Novartis AG (ADR) NVS as it looks for a favorable entry point.

However, the brokerage's long-term rating on the stock is Buy as many of the drugs under development are considered breakthrough treatments and should benefit from strong pricing power.

"Over the next several years, we expect the company to launch several new drugs in such critical areas as coronary disease and oncology," analyst John Eade wrote in a note.

Switzerland-based Novartis recently completed a three-part deal in which it sold its vaccine business to GlaxoSmithKline plc (ADR) GSK, bought the Glaxo's oncology business, and merged its consumer healthcare business in a JV with the Glaxo consumer healthcare unit.

The transaction should help Novartis to focus on its strengths – eye care, autoimmune disorders, oncology and generics – while exiting noncore businesses.

Eade now expects 2016 earnings of $4.75 per ADR, down from his previous forecast of $4.80. However, the analyst maintained his preliminary 2017 earnings estimate of $5.20 per ADR, as the company begins to benefit from its restructuring efforts.

Shares have underperformed over the past quarter, gaining 4 percent while the S&P 500 has advanced 5.5 percent. Over the past year, the shares have also underperformed, falling 14 percent while the broad market has risen 17 percent.

"If Novartis restores growth at Alcon sooner than we expect or the share price drops back to the mid-$70s for non-fundamental reasons, we would consider an upgrade," Eade added.