Is Abbott Stock A Better Pick Over This Pharmaceuticals Bellwether?

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ABT: Abbott Laboratories logo
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Abbott Laboratories

We believe that Abbott stock (NYSE: ABT) is a better pick than its sector peer, Johnson & Johnson stock (NYSE: JNJ). Both stocks are trading at a similar valuation of a little over 4x trailing revenues. Although Abbott has seen better revenue growth over recent years, J&J is more profitable. Still, in our view, Abbott’s better prospects and attractive valuation make it a better pick.

Looking at stock returns, JNJ has outperformed ABT and the broader indices. While JNJ is down 2% in the last twelve months, ABT is down 12%, and the S&P500 index is down 6%. There is more to the comparison, and in the sections below, we discuss why we believe ABT stock will offer slightly better returns than JNJ stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Abbott vs. Johnson & JohnsonWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Abbott’s Revenue Growth Is Better

  • J&J’s revenue growth of 5% over the last twelve months is higher than 1% for Abbott.
  • However, if we look at a longer time frame, Abbott has fared better, with its sales rising at an average annual rate of 11.4% to $43.7 billion in 2022, compared to $31.9 billion in 2019, while J&J saw its sales rise at an average rate of 4.9% to $95.6 billion in 2022, vs. $82.1 billion in 2019.
  • A high demand for Covid-19 testing drove Abbott’s sales growth in recent years. However, as the Covid-19 cases have declined over the last year or so, the demand for testing is falling, weighing on Abbott’s diagnostics business.
  • That said, the company’s medical devices and established pharmaceutical sales will likely grow steadily over the coming years.
  • While J&J’s medical devices business faced headwinds in 2020 due to the pandemic’s impact, it rebounded in 2021.
  • The pharmaceuticals segment saw a 14% rise in 2021 sales and 2% growth in 2022, while the medical devices segment sales were up 18% and 1% over the same period, respectively.
  • The company’s pharmaceuticals business is seeing strong growth led by market share gains for its cancer drugs, Darzalex and Erleada, and immunology drugs, Stelara and Tremfya. However, declining sales of some of its drugs, including Remicade, have offset this growth.
  • Our Abbott Revenue Comparison and Johnson & Johnson Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Abbott’s revenue is expected to grow just a tad faster than J&J’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 3.6% for Abbott, compared to a 3.2% CAGR for J&J, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. J&J Is More Profitable 

  • J&J’s operating margin of 25.2% over the last twelve-month period is better than 20.4% for Abbott.
  • The figures stood at 24.1% and 16.1% in 2019, before the pandemic, respectively.
  • Abbott’s free cash flow margin of 21.9% is slightly lower than 22.8% for J&J.
  • Our Abbott Operating Income Comparison and Johnson & Johnson Operating Income Comparison dashboards have more details.
  • Looking at financial risk, both are comparable. J&J’s 15% debt as a percentage of equity is higher than 9% for Abbott, but its 17% cash as a percentage of assets is also higher than 14% for the latter, implying that Abbott has a better debt position, but J&J has more cash cushion.

3. The Net of It All

  • We see that Abbott has demonstrated better revenue growth over the recent years and has a better debt position. On the other hand, J&J has seen better revenue growth over the recent quarters, is more profitable, and has more cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Abbott is the better choice of the two.
  • If we compare the current valuation to the historical average, Abbott fares better, with its stock currently trading at 4.1x trailing revenues vs. the last five-year average of 5.6x. In contrast, J&J’s stock trades at 4.4x trailing revenues vs. the last five-year average of 5.0x. Our Abbott (ABT) Valuation Ratios Comparison and Johnson & Johnson (JNJ) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for Abbott and J&J over the next three years and points to an expected return of 18% for Abbott over this period vs. a 12% expected return for J&J, based on Trefis Machine Learning analysis – Abbott vs. Johnson & Johnson – which also provides more details on how we arrive at these numbers.

While ABT may outperform JNJ over the next three years, it is helpful to see how Abbott’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Xylem vs. Merck.

With higher inflation and the Fed raising interest rates, among other factors, ABT stock has fallen 12% in the last twelve months. Can it drop more? See how low Abbott stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Feb 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
ABT Return -7% -6% 167%
JNJ Return -3% -11% 37%
S&P 500 Return -2% 4% 78%
Trefis Multi-Strategy Portfolio -3% 9% 242%

[1] Month-to-date and year-to-date as of 2/23/2023
[2] Cumulative total returns since the end of 2016

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