Roche Holding AG (Roche, ROG) founded 125 years ago, specializes in innovative pharmaceuticals and diagnostics. It has been providing cancer treatment with its medicines for 50 years. The company has large and diversified portfolio of 17 biopharmaceuticals. Roche is a pioneer in personalized healthcare as it was one of the first companies to bring targeted treatment to patients. Both divisions, Pharmaceutical and Diagnostics, are very important players in Roche’s further drive towards personalized healthcare. The company invests heavily in Research and Development, about 9 B Swiss Francs every year, more than its peers. It is one of the world’s largest healthcare companies and is present in more than 100 countries. The company has very strong S&P rating AA.

On February 4 Roche reported 2020 results. It announced that fully achieved its 2020 targets despite the pandemic caused headwinds. In its outlook 2021 the company aims to grow sales and defend margins despite continuing challenges. Roche assumes normalization of macro environment in the second half of 2021.

   Revenue

Over the last 5 years Roche sales have grown 4% on average each year, very good growth for such big company. In 2020 sales are CHF 58.3 B, up 1% in constant exchange rate (CER) terms. Sales in Pharmaceutical division were down but more than compensated by the growth in Diagnostics division.

The impact of the pandemic on quarterly sales growth can be seen on this graph:

Sales in Pharmaceuticals were negatively impacted by the increased competition in biosimilars where sales were down CHF 5 B for 2020. Also reduced hospitalizations and outpatient visits weighed on sales. Roche experiences strong growth for new products which partly compensated for sales declines. The revenue is shifting towards new products. At present they account for 47% of new sales.

Roche is the leading provider of diagnostics. In 2020 strong sales growth was driven by COVID – 19 testing demand. Growth was driven by Molecular Diagnostics (90% growth for the year), partly offset by Diabetes Care (down 5%). Roche launched its own rapid antigen test and company aims to manufacture 80 M units per month in the nearest time. Elevated demand for COVID – 19 testing should continue for some time.

Growing and aging population will support long term demand growth in healthcare. Roche’s strong fundamentals and high quality pipeline should support sales growth at the level anticipated by the company in 2021 outlook.

   Profitability

Over the last 5 years the company managed to grow its EPS almost 10% annually. That is very impressive growth. It is supported by improving margins, growing sales and successful acquisitions. For 2020 both core operating profit (CHF 21.5 B) and core EPS (CHF 19.16) of the company are up 4% for the year. Operating profit in Diagnostics division is up 50%. Net income increased 17% year – on – year to CHF 15 B at CER.

The company’s strong pipeline and Research and Development efforts should allow core EPS growth above sales growth.

   Dividend

Roche has impressive history of dividend growth – it is increasing dividend for 34 years in the row.

For 2020 the company increased dividend to CHF 9.1 per share. Current dividend yield is 2.94%. Current payout ratio is a healthy 46%, so dividends are well covered by earnings.

   Financial Strength

Last year debt increased by 6%, in CER terms, to CHF 14.2 B and equity was CHF 39.8 B. So Debt/Equity ratio stands at 36%. However in terms of total assets debt is only 2%, substantially lower than in 2019. Net Debt/Equity ratio is also very low, 5%. Operating cash flow, CHF 18.57 B, is higher than debt. So debt level is not causing any problems for the company.

   Investment case

Now we project the future share price of BP using historical average P/E ratio. The following assumptions are made to evaluate a stock price.

  • EPS grows 8% per year on average over the next 5 years. Then in 5 years EPS will be CHF 24.58 per share.
  • Dividend is CHF 9.1 and we could assume that it would grow in the future at 2% per year (over the last 5 years growth was 2.3%). So the total dividend income would be CHF48.3 per share.
  • Future buy backs are not taken into account.

Multiplying future EPS (CHF 24.58) by the average P/E over the last 5 years (16.5, see Stockscreen), gives us the rough indication of the stock price in 5 years period:

CHF 24.58 x 16.5 = CFH 405.6

That means Roche’s stock price upside potential is 31% from the current price CHF 309.35 under the above assumptions.

Taking into account the expected dividend income over the next 5 years (CHF48.3), the overall return on investment, if the stock is bought today, with dividends not reinvested, could be around 47% over the 5 years period or about 8% compound return each year on average. It is good return for this low risk company with strong fundamentals and experienced management.

Notes

Source of pictures – the company’s presentation of 4th quarter and full year results and other pages of its website, unless otherwise stated. 

Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation.

The estimates made in the article are for the informational purposes only. They are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article as a starting point for your own due diligence.

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