Should You Pick JNJ Stock After An Upbeat Q3?

Johnson & Johnson (NYSE: JNJ) recently reported its Q3 results, with revenues and earnings exceeding our estimates. The company reported revenue of $22.5 billion and adjusted earnings of $2.42 per share, compared to our estimates of $22.2 billion and $2.20, respectively. In this note, we discuss Johnson & Johnson’s stock performance, key takeaways from its recent results, and valuation.

Johnson & Johnson’s Q3 Performance Was Better Than Estimates

Johnson & Johnson’s revenue of $22.5 billion in Q3 was up 5.2% y-o-y. The company reported a 4.9% rise in Innovative Medicine (pharmaceuticals business) and a 5.8% growth for its MedTech (medical devices business) segment. The pharmaceuticals sales growth was led by continued market share gains for Darzalex, Erleada, Spravato, and Tremfya, among others. One of its top-selling drugs, Stelara, saw its revenue fall 6.6% y-o-y to $2.7 billion in Q3. Stelara is expected to see a meaningful decline in the coming years, given the biosimilar competition. MedTech sales growth was led by electrophysiology and cardiovascular products.

Johnson & Johnson’s adjusted net earnings margin stood at 26.1% during the quarter, compared to 31.7% in the prior-year quarter. This can partly be attributed to one-time special charge and acquired IPR&D. With margin contraction, the company’s bottom-line of $2.42 was down 9% y-o-y, but well above ours as well as the consensus estimates.

Looking forward, Johnson & Johnson raised its reported sales outlook to $88.6 billion at the mid-point of the guided range, versus its prior guidance of $88.2 billion. However, it cut its adjusted earnings outlook to $9.91 per share, versus $10.05 earlier, primarily due to the costs associated with the V-Wave acquisition.

What Does It Mean For JNJ Stock?

Although Johnson & Johnson posted an upbeat Q3, its stock hasn’t seen any meaningful growth post the results announcement, partly due to a slight cut in earnings guidance. We maintain our Johnson & Johnson’s Valuation of $172 per share, reflecting only 5% upside from its current levels of $165. Our forecast is based on a 17x P/E multiple for JNJ and expected earnings of $9.95 on a per-share and adjusted basis for the full year 2024. The 17x figure aligns with the stock’s average P/E multiple over the last five years.

JNJ stock, with 7% gains this year, has underperformed the broader S&P500 index, up 23%. Looking at a slightly longer term, the annual returns for JNJ stock were considerably less volatile than the S&P 500. Similarly, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. But, it 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.

While JNJ stock looks like it has little 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 10/16/2024
[2] Cumulative total returns since the end of 2016

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