MedTech To Drive Johnson & Johnson’s Q2?

Johnson & Johnson stock (NYSE: JNJ) will report its Q2 2024 results on Wednesday, July 17. We expect the company to post revenue of $22.5 billion and earnings of $2.72 per share, broadly aligning with the consensus estimates of $22.4 billion and $2.71, respectively. J&J will likely continue to benefit from higher MedTech sales amid a robust recovery in global procedure volumes. On the pharmaceuticals side, Darzalex, Erleada, and Tremfya should continue to lead the growth. So, what are some of the trends that are likely to drive J&J’s results?

Firstly, let us look at JNJ stock performance in recent years. JNJ stock has seen little change, moving slightly from levels of $155 in early January 2021 to around $150 now, vs. an increase of about 50% for the S&P 500 over this roughly three-year period. Overall, the performance of JNJ stock with respect to the index has been quite volatile. Returns for the stock were 9% in 2021, 3% in 2022, and -11% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that JNJ underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Health Care sector, including UNH, and MRK, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could JNJ face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, JNJ stock looks like it has ample room for growth. We estimate Johnson & Johnson’s valuation to be $180 per share, reflecting a 20% upside from its current price of around $150. Our forecast is based on a 17x P/E multiple for J&J and expected earnings of $10.70 on a per-share and adjusted basis for the full-year 2024. The 17x figure aligns with the stock’s average P/E over the last five years.

Looking at the previous quarter, Johnson & Johnson’s revenue of $21.4 billion in Q1 was up 2.3% y-o-y. The company reported a 1.1% rise in Innovative Medicine (pharmaceuticals business) and a 4.5% growth for its MedTech (medical devices business). Excluding the Covid-19 vaccine, the pharmaceuticals sales grew 8.3% y-o-y, led by continued market share gains for Darzalex, Erleada, Carvykti, and Tremfya, among others. Although one of its top-selling drugs, Stelara, saw its revenue remain flat y-o-y at around $2.5 billion in Q1, the drug will face biosimilar competition later this year.

Coming to the latest quarter, J&J should continue to benefit from its multiple myeloma treatment – Darzalex – which has been the key growth driver for the company’s pharmaceuticals business in the recent past. Some of the company’s new drugs, including Carvykti – a multiple myeloma treatment, and Spravato – an antidepressant – have been gaining market share, a trend expected to continue in the near term. On the MedTech side, J&J should benefit from an overall pickup in global procedure volume. Also, Abiomed should do well, driven by an increased adoption of Impella technology. Note that the prior-year quarter sales of $25.5 billion included its consumer healthcare sales, which are now separated.

Overall, we expect J&J to navigate well in Q2. While there are near-term headwinds for the company, primarily from Stelara’s biosimilar competition later this year, we think it’s already priced in, with JNJ stock down 5% year-to-date, versus about a 20% rise in the broader S&P500 index.

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