Should You Pick Johnson & Johnson Stock At $155 After Q2 Beat?

Johnson & Johnson (NYSE: JNJ) recently reported its Q2 results, with revenues aligning and earnings exceeding our estimates. The company reported revenue of $22.4 billion and adjusted earnings of $2.82 per share, compared to our estimates of $22.5 billion and $2.72, respectively. In this note, we discuss Johnson & Johnson’s stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at the stock performance in recent years. JNJ stock has seen little change, moving slightly from levels of $155 in early January 2021 to around $155 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 some room for growth. We estimate Johnson & Johnson’s Valuation to be $172 per share, reflecting around 10% upside from its current levels of $155. Our forecast is based on a 17x P/E multiple for JNJ and expected earnings of $10.04 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. J&J now expects its adjusted earnings per share for 2024 to be in the range of $9.97 and $10.07, compared to its prior guidance of $10.57 and $10.72, due to costs associated with its Shockwave Medical acquisition.

Johnson & Johnson’s revenue of $22.4 billion in Q2 was up 4.3% y-o-y. The company reported a 5.5% rise in Innovative Medicine (pharmaceuticals business) and a 4.3% growth for its MedTech (medical devices business). Excluding the Covid-19 vaccine, the pharmaceuticals sales grew 8.8% y-o-y, led by continued market share gains for Darzalex, Erleada, Spravato, and Tremfya, among others. Although one of its top-selling drugs, Stelara, saw its revenue rise 3.1% y-o-y to around $2.9 billion in Q2, the drug will face biosimilar competition later this year.

The continued growth in the MedTech segment can partly be attributed to the higher Electrophysiology sales and Abiomed acquisition, which was closed in December 2022. Abiomed sales were up 14.5% y-o-y, while Electrophysiology revenue was up 10.6%. However, Surgery sales were down 4.1%. The company saw its adjusted net income margin contract by 80 bps y-o-y to 30.5%. J&J’s bottom line expanded 10.2% y-o-y to $2.82 on an adjusted basis.

JNJ stock hasn’t seen any gains this year, underperforming the broader S&P500 Index, up around 17%. Although the challenging macroeconomic factors, higher costs, and patent expiry for Stelara are some risk factors, we think much of these are already priced in. On the positive side, the company’s acquisition of Shockwave Medical earlier this year will bolster its Cardiovascular sales, and market share gains for some of its new drugs, including Tremfya, will drive the growth for its pharmaceutical business. With JNJ stock trading at 15x forward earnings (versus the average of 17x over the last five years), we think there is some room for growth from here.

While JNJ stock looks like it has some room for growth, 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 7/18/2024
[2] Cumulative total returns since the end of 2016

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