Can J&J (JNJ) Overcome Its 5-Year Stock Slump?
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From Band-Aids to bionic joints, Johnson & Johnson (JNJ) has been mending humanity for over a century. But in 2023, all that changed. In a strategic shift, J&J spun off its consumer health division into a separate company called Kenvue (KVUE). That transformation has garnered positive attention, according to our TrackStar data. Financial pros and retail investors were impressed with the company’s 5.2% revenue growth year-over-year, up from 4.3% last quarter, and guidance for 5.7%-6.2% growth in Q4. Yet, the stock has been lackluster to say the least, up just 5.2% year-to-date and just 25.9% over the past five years. So, has this new structure materially changed J&J’s outlook or is it still a value trap? Johnson & Johnson’s Business J&J touches millions of lives daily, stocking medicine cabinets and equipping operating rooms worldwide. In 2023 alone, J&J poured a staggering $11.9 billion into R&D, fueling a relentless pursuit of medical breakthroughs. This healthcare juggernaut, operating in 60 countries, has its fingers on the pulse of global wellness, offering everything from over-the-counter remedies to cutting-edge pharmaceuticals and surgical innovations. |
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Johnson & Johnson’s business is a tale of two powerhouses:
Q3 2024 saw J&J flexing its financial muscles with worldwide sales hitting $22.5 billion. Innovative Medicine played a vital role with a 4.9% boost, while MedTech sprinted ahead at 5.8%. The company’s pipeline remains strong, with notable advancements in oncology and immunology. J&J’s CAR-T therapy (oncology), CARVYKTI, showed an impressive 87.7% year-over-year growth in the third quarter. Additionally, the company is expanding its presence in cardiovascular care through strategic acquisitions like Shockwave Medical, which added $229 million in Q3 sales, positioning itself for future growth in this critical area. Financials
Source: Stock Analysis J&J’s latest sales forecast puts it at the upper end of its performance going back to 2014. While Covid vaccines boosted sales after the pandemic, that lift has largely dissipated. In fact, J&J is only seeing large percentage declines on sales for drugs that have a negligible sales impact. Now, it’s worth pointing out that J&J’s earnings dropped by +30% this quarter. However, if you strip out M&A impacts, Q3 EPS is only down 9% from the prior year. As of the time of this writing, we don’t have reporting on the balance sheet or cash flows for the quarter. However, some quick math says it should be roughly $3.9 billion, which is in line with Q1 of this year. So, for the rest of this analysis, we’ll use the annualized cash flows through Q2. Lastly, the company pays a 3.1% dividend while typically repurchasing around 1.5% of its outstanding shares. Valuation
Source: Seeking Alpha The updated ratios for J&J put its P/E ratio at 27.2x, which again is heavily influenced by the M&A costs. Excluding those items, we’re back to around 15.5x. But the P/E ratio doesn’t do as good of a job comparing these companies as price to cash flow, which notably holds Eli Lilly (LLY) in high regard because of its weight loss drugs. Otherwise, J&J is twice as expensive as Bristol Myers Squibb (BMY) and GlaxoSmithKline (GSK). Growth
Source: Seeking Alpha J&J’s sales growth hasn’t been great. In fact, it’s been worse than Bristol Myers, GlaxoSmithKline’s, and Abbvie’s (ABBV) in most cases, looking at the three and five-year averages. J&J’s forward outlook will likely improve as the latest guidance is incorporated into this chart. Profitability
Source: Seeking Alpha Note: J&J’s net income margin is 16.7%, not the 43.9% listed. J&J’s profitability is at the upper end of the group. Eli Lilly is doing well because of its huge sales boon. However, the rest have net income margins below J&J’s. And while Bristol Myers and Abbvie have higher free cash flow margins, they aren’t spending as much on R&D and acquisitions. Our Opinion 6/10 We were caught between six or seven out of ten for J&J. Compared to its peers, J&J doesn’t have a patent cliff or sales problems it faces. However, the stock’s performance is too lackluster to ignore. It’s entirely possible the company will improve from here. Yet, this is one of those big ships that will probably take a long time to turn. |
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