Streetwise

Lauren Rudd

Sunday, September 1, 2013

The Wall Street Huddle

When viewed dispassionately over time, it becomes apparent that much of the daily activity on Wall Street is merely a series of knee-jerk reactions, sponsored in part by computerized flash trading and often exacerbated by low volume. Never was this truer than over the past few weeks. Although such activity can be fertile ground for professional speculators, it can just as easily become quicksand for the uninitiated.

However, this is Labor Day weekend, which means the start of football season and the opportunity to once again point out the similarities between the grid iron and Wall Street. In football the offense usually huddles before each play by forming a circle around the quarterback, their bodies leaning forward, their heads bent inward and their butts pointing towards the rest of us.

On Wall Street, as the late Alan Abelson of Barron’s so ably pointed out, a huddle consists of an analyst calling out stock plays to an assembled group of wealthy clients, their bodies leaning forward, their heads bent down and their butts pointed at the rest of us. But wait; there is a proverbial flag down on the play. The defense of average investors is demanding a change in the rules to level the playing field.

Undeterred, the offense brings to the line of scrimmage its guards and tackles to counter even the slightest suggestion of change. It appears that the avarice on Wall Street is as limitless as the pain and suffering it has wrought upon Main Street.

To atone for its sins the Street tries to limit its investment ideas to a specific client base, meaning those that generate the largest fees and commissions. The justification of course is that in doing so they prevent those less generously endowed, financially speaking, from undergoing the duress of information overload. One cannot help but admire such altruistic ideals.

Nonetheless, you are not excluded from the world of potential investment gains. Consider for example Novo-Nordisk (NVO), a Danish healthcare company, with a 90 year history of innovation and achievement that has developed an extensive array of medical products and is a leader in its field.

When I last talked about the Company a year ago, my earnings estimate for 2012 was 5.90 with a 12-month target price on the shares of $175. The price back then was $156.23. In addition, there was an indicated dividend yield of 1.20 percent. So how well did the Company perform? Earnings for 2012 came in at $7.07 and the shares recently closed at $170.86 for a 9.40 percent capital gain.

And the Company marches on. For the first six months of 2013, as compared to the same period a year ago, Novo-Nordisk increased its operating profit by 19 percent in local currencies or 15 percent in Danish kroner to DKK 16.1 billion. Sales increased by 14 percent in local currencies and by 11 percent in Danish kroner to DKK 41.4 billion. (One Danish Krone is equal to $0.18.)

The Company’s gross margin increased 0.90 percent, in Danish kroner, to 82.6 percent, thereby reflecting a continued favorable price and product mix. Net profit increased by 27 percent to DKK 12.7 billion, with earnings per share increasing by 30 percent to DKK 23.43.

Management’s guidance for the full year is for sales growth, measured in local currencies, of between 11 and 13 percent, whereas operating profit growth measured in local currencies is now expected to increase 12 to 15 percent. Over the last 10 years, investors have seen $3.22 in share value for every dollar of retained earnings. When you do your own research on Novo-Nordisk, keep in mind that much of the financial data is released in Danish Kroner.

The intrinsic value of the shares, using a discounted earnings model with a growth rate of 14.63 percent and a discount rate of 15 percent is $186. The more conservative free cash flow the firm approach yields an intrinsic value of $274 per share.