Wednesday, June 22, 2016


The ideal valuation process is an intelligence gathering operation. It should include both qualitative and quantitative data gathering and assessment.

Some of my clients are quick to jump into the quantitative estimation methods. However, notice that the four filter methods used by Warren Buffett and Charlie Munger take an approach that emphasizes three qualitative steps/filters prior to trying a quantitative estimation of intrinsic value per share. For example, take a look at this look into NVO where I place an admonition in front of the quantitative estimate pasted in further below.

"A November 2014 newspaper article suggested that a recent medical research breakthrough at Harvard University (creating insulin-producing cells from embryonic stem cells) could potentially put Novo Nordisk out of business. Dr Alan Moses, the chief medical officer of Novo Nordisk, commented that the biology of diabetes is incredibly complex but also that Novo Nordisk's mission is to alleviate and cure diabetes. If this new medical advance "...meant the dissolution of Novo Nordisk, that'd be fine." then, look here...

A look at NVO with an assumed growth rate of 7 percent.
Does NVO make for an intelligent investment or intelligent speculation today?1. Understand the economics of this business.2. Are there Sustainable Competitive Adantages?3. Are there Able and Trustworthy Managers?4. Is there a Margin of Safety from a bargain price

Starting with a base estimate of annual Free Cash Flow at a value of approximately $30,000,000,000 and the number of shares outstanding at 1,960,000,000 shares; I used an assumed FCF annual growth of 7 percent for the first 10 years and assume zero growth from years 11 to 15.  

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $227.84.
Market Price = $52.42 Intrinsic Value = $227.84 (estimated) Debt/Equity ratio = .01 Price To Value (P/V) ratio = .23 and the estimated bargain = 77. percent.

Mr. Market may have overreacted downward recently. Here is an article below that you can discuss. The big question is whether NVO can maintain my conservative growth rate of 7% with current offerings and/or new product offerings. If so, then it is a great bargain in a high quality business that has produced impressive net incomes and free cash flow.

NVO has very little debt and it has impressive net profit margins.

Why This Pharma Giant Lost $8 Billion in Market Cap This WeekIts diabetes drug didn't cut heart attacks and other risks as much as expected.

Further "intelligence gathering and assessment" is obviously needed.