Johnson & Johnson Poised To Do Well, But Are These Steady Eddie Stocks Better Bets?

If you are a Johnson & Johnson (NYSE:JNJ) investor and have been enjoying the stock’s steady dividends, it may be time to look elsewhere. As of this moment, we find DaVita (NYSE:DVA) – a healthcare company focused on kidney dialysis services – and Duke Energy (NYSE:DUK) – an electric and natural gas utility company based in North Carolina – as more attractive buys than Johnson & Johnson.

Why? Simply because the valuation and growth numbers tell us so. DaVita and Duke Energy stocks have both seen higher growth in revenue and operating profits than Johnson & Johnson in the last twelve months, as well as the most recent quarter. Not only that, they’re both cheaper than Johnson & Johnson

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the magnificent 7. Full HQ performance story here.

Better Buys Than JNJ – DVA & DUK Stocks?

Specifically, to illustrate the opportunity for DaVita, you pay $7.76 per dollar of earnings-before-interest-and taxes (EBIT) for DVA stock versus $16.63 for JNJ, and get higher annual growth (5.8% vs -18%), higher quarterly growth (6.9% vs -12.1%), and better margin trend (3.1% vs 2.0%). Overall, you get higher revenue, and operating profit growth from DaVita and Duke Energy, and pay less than JNJ stock. See our complete analysis of Better Bets Than JNJ Stock

So What’s The Catch?

Now, could Johnson & Johnson buck the trend? Could it grow its revenues and profits much faster than DaVita or Duke Energy in the coming quarters? Of course that’s possible.  J&J has seen strong sales in pharmaceuticals and medical devices, driven by Darzalex (multiple myeloma) and Stelara (autoimmune). New drugs like Carvykti (multiple myeloma) and Spravato (antidepressant) are also gaining market share. J&J’s operating margin has expanded from 23.9% in 2020 to 27.5% in 2023. If the company continues this trend, it could see stronger profit growth.

The data below shows both DaVita and Duke Energy outperformed Johnson & Johnson recently and over the last year. They might repeat this. Related ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than Johnson & Johnson, To Get More Revenue And Profit Growth?

While DVA has seen the strongest revenue growth of the three in the last twelve months and the last quarter, JNJ has seen the slowest growth over the period. Moreover, DVA margins have expanded better than JNJ over the last twelve months. However, despite this, JNJ stock trades at a higher price-to-operating income ratio of almost 17x, compared to levels of roughly 8x for DVA.

What About Relative Market Returns?

DVA stock has shown a stronger market performance, with returns of 21% over the past 6 months, and 50% over the past 12 months. In comparison, JNJ returns for the same periods were weaker at 2.7%%, and 2.9%, respectively, although it outperformed marginally over the last 3 months.

How Did These Metrics Look 1 Year Ago – Could JNJ’s Combination Of Higher Valuation & Lower Growth Persist?

JNJ still had a higher valuation of $15.7 vs $7.18 for DVA but higher annual growth (13.2% vs 0.4%), higher quarterly growth (5.6% vs 2.0%), and more favorable margin change (0.7% vs -3.3%). The situation looks quite different now which means that market reward could switch in favor of DVA and DUK.

Investment Thesis

Duke Energy generates a steady cash flow via regulated utility operations and the business offers considerable protection during economic downturns. The stock is also an attractive bet for income-focused investors, with its dividend yield of about 3.7% coming in ahead of J&J. The company has also been aggressively investing in renewable energy – including solar and wind – enabling the company to cash into regulatory incentives while driving growth as demand for clean energy increases.

DaVita is a leading player in the dialysis market. Demand for kidney care services has been expanding driven by an aging population as well as rising rates of chronic kidney disease. Moreover, the company’s revenue base is recurring in nature. While the company focused extensively on cost controls during the Covid-19 pandemic as demand for its services took a hit, treatment volumes have recovered strongly over the past two years, helping earnings pick up. EPS is poised to grow 30% this year, per consensus estimates.

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 8/29/2024
[2] Cumulative total returns since the end of 2016

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