What’s Next For Johnson & Johnson Stock After A 6% Decline In A Month?

Johnson & Johnson (NYSE: JNJ) recently announced its plans to acquire Shockwave Medical for $13 billion. Shockwave will help J&J extend its offerings in the cardiovascular intervention market. This acquisition will expand sales growth for J&J’s MedTech segment, which has seen its sales rise at an average annual rate of 10% in the last three years. Shockwave generated revenue of $730 million in 2023, and it will likely garner sales of around $900 million in 2024. While SWAV stock has risen 26% in a month, JNJ stock has seen a decline of 6%. J&J’s offer of $13 billion implies a 17% premium to Shockwave’s price on March 25, a day before the Wall Street Journal broke the news on a possible deal.

Looking at a slightly longer term, 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 40% 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 LLY, 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 some room for growth. We estimate Johnson & Johnson’s Valuation to be $180 per share, reflecting over 15% upside from its current levels of $152. Our forecast is based on a 17x P/E multiple for JNJ and expected earnings of $10.70 on a per-share and adjusted basis for the full year 2024. The 17x P/E multiple aligns with the average value over the last five years.

Johnson & Johnson’s revenue of $85.2 billion in 2023 was up 6% y-o-y. The company reported a 4% rise in Innovative Medicine (pharmaceuticals business) and an 11% growth for its MedTech (medical devices business). The multiple myeloma treatment – Darzalex and the autoimmune drug — Stelara — have been the key growth drivers for the company in the recent past. While Darzalex sales grew 22% to $9.7 billion, Stelara sales were up 10% to $10.9 billion. However, Stelara lost market exclusivity in the U.S. last year. The company expects the biosimilars for Stelara to hit the market in early 2025. Some of the company’s new drugs, including Carvykti — a multiple myeloma treatment, and Spravato — an antidepressant — have been gaining market share. Carvykti alone is expected to garner over $5 billion in peak sales. ^[1]

The strong growth in the MedTech segment can partly be attributed to the Abiomed acquisition, which was closed in December 2022. It accounted for nearly 5% of the total 12% rise for the segment in 2023. After Abiomed, J&J acquired left atrial appendage (LAA) device maker –Laminar Inc. – in November 2023 for $400 million. This, followed by the Shockwave acquisition, will help J&J expand MedTech segment sales growth at a time when its pharmaceuticals business will feel the pinch from Stelara biosimilar competition. Although the company has been eyeing inorganic growth for its MedTech business, lately its electrophysiology and vision business has been driving the organic sales growth.

We estimate J&J’s overall sales to rise at a CAGR of 3% to $92.8 billion in the next three years, with the MedTech business accounting for a faster growth than the Innovative Medicine segment. We expect earnings to grow at a slightly higher rate than its top-line growth, led by margin expansion. Overall, with JNJ stock trading at 14x forward earnings, compared to the 17x average over the last five years, we think there is some room for growth from here.

While JNJ stock looks like it will likely see higher levels, it is helpful to see how Johnson & Johnson’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 4/9/2024
[2] Cumulative total returns since the end of 2016

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1. Johnson & Johnson still expects Carvykti to hit at least $5 bln peak sales -CFO, Reuters, Jan 23, 2024 [↩]