Novartis (NVS) Likely To Beat Q2 Earnings: Stock To Gain?

Novartis AG (NYSE:NVS) is scheduled to report second-quarter 2016 results on Jul 19.

Novartis’ track record has been quite bleak, with the company beating estimates in only one of the last four quarters. In the last reported quarter, it recorded a negative earnings surprise of 0.85%. Overall, Novartis has posted an average negative earnings surprise of 1.98% for the four trailing quarters. Let’s see how things are shaping up for this announcement.

Factors to Impact the Quarter

2016 is expected to be a transformational year for Novartis. The company’s ophthalmologic division, Alcon, was facing challenging conditions due to a decline in surgical equipment sales in the U.S. and emerging markets as well as intensifying generic competition in the country for ophthalmic pharmaceuticals.

In a bid to revamp its beleaguered Alcon business, Novartis decided to move its ophthalmic pharmaceuticals business to the pharmaceuticals division. Consequently, the Alcon division will focus solely on the surgical and vision care businesses. The restructuring plan is expected to result in savings of $1 billion through 2020. The company also transferred approximately $1 billion of mature products from Pharma to Sandoz. Novartis is also expected to face headwinds in the form of generic competition for Gleevec, additional spending related to the launch of Entresto and Cosentyx, as well as expenditure on Alcon.

On the other hand, unfavorable movement in foreign exchange rates is estimated to impact sales by 3% in the second quarter of 2016 and earnings by 4%. In terms of sales growth, the second quarter is expected to be the worst as the company is integrating products from GlaxoSmithKline plc (NYSE:GSK) and expects to realize the full-quarter impact of generic competition for Gleevec. Loss of patent protection for some key drugs, including Diovan and Exforge, in Novartis’ portfolio will also impact results.

On a positive note, Sandoz, Novartis’ generic arm, continues to strengthen its biosimilars portfolio and pipeline, which should offset weakness in the Alcon segment. Meanwhile, investor focus should remain on the sales ramp up of newly launched drugs (20 approvals in 2015), Entresto, Glatopa and Cosentyx. Main growth drivers at the oncology segment are Tasigna, Jakavi and Jadenu, the improved formulation of Exjade. Gilenya for the treatment of multiple sclerosis should also do well.

Earnings Whispers

Our proven model conclusively shows that Novartis is likely to beat estimates in the quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is the case here, as elaborated below.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +0.85%.

Zacks Rank: The combination of Novartis’ Zacks Rank #3 and positive ESP indicates a likely earnings beat this quarter.

On the other hand, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

NOVARTIS AG-ADR Price and EPS Surprise

NOVARTIS AG-ADR Price and EPS Surprise | NOVARTIS AG-ADR Quote

Here are a couple of health care stocks that you may want to consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Johnson& Johnson (NYSE:JNJ) has an Earnings ESP of +0.60% and a Zacks Rank #2. The company is scheduled to report second-quarter results on Jul 19.

Gilead Sciences Inc. (NASDAQ:GILD) has an Earnings ESP of +6.91% and a Zacks Rank #2. The company will report results on Jul 25.