Should You Buy Johnson & Johnson Stock At $160?
Despite a 45% rise since the March 23 lows of last year, at the current price of around $161 per share we believe that pharmaceuticals bellwether, Johnson & Johnson (NYSE: JNJ), looks attractive and it can see more upside from the current levels. JNJ stock has rallied from $111 to $161, underperforming the S&P 500 which moved 71%, with resumption of economic activities as lockdowns are gradually lifted and vaccines are being approved in multiple countries. The underperformance of J&J can partly be attributed to possible manufacturing delays for the Covid-19 vaccine, along with the increased pressure on sales for some of its drugs, including Remicade, due to biosimilar competition. Looking at a wider time horizon, JNJ stock is up just 25% from levels seen in early 2019.
The 25% rise over the last 2 years can largely be attributed to favorable changes in the company’s P/E ratio. Looking at fundamentals, total revenue have hovered around $82 billion over the recent years, while its net margins declined by 40 bps to 18.4% in 2019, compared to 18.8% in 2018. J&J’s total shares outstanding declined by 1.5%, translating into EPS growth of just 0.4% to $5.72 in 2019, compared to $5.70 in 2018.
Looking at last 12 months period, the company’s total revenue dropped to $80.9 billion, while its EPS stood at $6.46. We believe that the stock could continue to trend higher from the current levels. Our dashboard, ‘What Factors Drove 25% Change in Johnson & Johnson Stock between 2018 and now?‘, has the underlying numbers.
So what’s the likely trigger and timing for further upside?
J&J is developing one of the most closely watched Covid-19 vaccines, considering that it is a single-dose shot that should be relatively easy to distribute. However, it may be as much as 2 months behind in production, given it aimed at over 1 billion doses to be ready by the end of 2021. While the vaccine by itself is a not-for-profit venture for J&J, it will likely be important in helping the company rebuild its brand image after it faced setbacks amid lawsuits relating to contamination of its baby and other talc products.
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Beyond the Covid-19 vaccine, J&J will likely see a steady revenue growth over the coming years. Now that the overall volume of total procedures performed has increased over the recent months, implying an increase in hospital visits, and higher number of prescriptions issued, boding well for J&J. The company’s 3 important drugs – Imbruvica, Darzalex, and Stelara – are gaining market share, and they will likely be the key growth drivers going forward.
J&J is set to report its Q4 and full year 2020 results on Tuesday Jan 26, and we expect the company to beat the consensus estimates for revenues as well as earnings on strong sequential growth in pharmaceuticals as well as the medical devices businesses. Our dashboard on Johnson & Johnson Pre-Earnings provides more details.
At the current price of $161 per share, JNJ stock is trading at a mere 18x its projected earnings of $9.00 on a per share and adjusted basis for 2021, largely in-line with the levels seen over the recent years, 18x in 2017 and 17x as recent as late 2019. However, with the company’s businesses expected to see steady growth going forward, led by market share gains for some of its blockbuster drugs, clubbed with margin expansion due to better product mix and cost cutting measures, this will result in strong earnings growth over the coming years. As such, we believe the company will likely see its multiple expand led by steady earnings growth going forward, implying more gains for JNJ stock.
While JNJ stock may be undervalued, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Pfizer vs Merck.
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