Is Johnson & Johnson A Better Bet Compared To Bristol-Myers Squibb After 15% Decline?

Based on historical performance, Johnson & Johnson (NYSE: JNJ) appears to be less attractive compared to Bristol-Myers Squibb (NYSE:BMY) in the current crisis. The current coronavirus crisis will likely impact pharmaceutical companies on two fronts, 1. supply chain disruptions, and 2. potential impact on direct sales due to postponement of minor health related issues and surgeries. On the positive side, pharmaceutical companies are also busy developing a vaccine for COVID-19, which could be a growth driver in 2021 and beyond. Johnson & Johnson in particular is working with the Biomedical Advanced Research and Development Authority (BARDA) on a COVID-19 vaccine for clinical trials. The company is expected to begin clinical trials of a vaccine by November 2020.  Johnson & Johnson’s stock is down by about -17% compared to about -16% for Bristol-Myers Squibb since early February.

Pharmaceutical companies usually are defensive plays in times of financial crisis, which explains the outperformance of these stocks vis-a-vis S&P 500, which has declined over 21% since early February. While the outlook for both companies remains strong, as both the companies have a strong pipeline and existing drugs portfolio to drive revenue growth, we believe Bristol-Myers Squibb could be a better bet in the current environment. Bristol-Myers Squibb’s solid oncology portfolio and a massive ramp-up in cardiovascular drugs sales could help it cope better than Johnson & Johnson over the crisis. Though it should be noted that Johnson & Johnson’s balance sheet is much stronger with net debt of $18 billion compared to $32 billion for Bristol-Myers Squibb.

Our analysis, Is Johnson & Johnson Expensive Or Cheap Compared To Bristol-Myers Squibb After Declining Over -15%? compares the stock price performance and fundamentals of Johnson & Johnson and Bristol-Myers Squibb over the last few years.

Coronavirus Crisis

• Johnson & Johnson’s stock has declined by about 17% since early February, compared to 16% for Bristol-Myers Squibb, after the WHO declared a global health emergency relating to Coronavirus.
• Johnson & Johnson and Bristol-Myers Squibb’s stocks have fallen by about 13% since March 8th, as U.S. cases accelerated.

Historical Performance

• Johnson & Johnson stock went from $47.35 at the end of 2009 to $144.95 at the end of 2019, representing a change of 206.1%.
• During the same time period, the Bristol-Myers Squibb Company went from $18.60 to $63.74 representing a change of 242.7%.
• This implies that Johnson & Johnson stock grew at 0.8x the rate of Bristol-Myers Squibb Company

Is Johnson & Johnson stock expensive based on a review of the fundamentals?

• P/E Ratio:
  • Johnson & Johnson’s current P/E multiple (based on 2019 results) stands at about 14x, compared to about 11x for Bristol-Myers Squibb.
  • Bristol-Myers Squibb’s P/E multiple has declined sharply from 28x in 2014 to 11x currently.
• Historical Revenue Growth:
  • Johnson & Johnson 2014-19 annualized revenue growth of 2% is 0.2x that of the 2014-19 BMY annualized revenue growth rate of 10.6%.
• Historical EPS Growth:
  • Johnson & Johnson’s 2014-19 annualized adjusted EPS growth of 8% is 0.4x that of the 2014-19 annualized adjusted EPS growth rate of 21% for Bristol-Myers Squibb.
• Total Debt:
  • Johnson & Johnson’s Total Debt has increased from $19 billion to $28 billion between 2014 and 2019.
  • In comparison, Total Debt for Bristol-Myers Squibb Company has risen from $8 billion to $47 billion.
  • Bristol-Myers Squibb’s debt levels have increased significantly in 2019, after it acquired Celgene.

Conclusion

Brisol-Myers Squibb has posted much higher revenue growth compared to Johnson & Johnson over the last 6 years, Both the companies’ stocks have been more resilient through the crisis, thus far, and Bristol-Myers Squibb could see a larger upside if the health crisis abates, considering its EPS growth has been much higher than Johnson & Johnson. Bristol-Myers Squibb is more leveraged compared to Johnson & Johnson, but that debt has increased only recently as the company acquired Celgene. In terms of cash flows, both the companies have enough cash from operations to cover for their interest expenses. Moreover, Bristol-Myers Squibb’s P/E ratio is lower compared to its own historical P/E ratio, as well as that of Johnson & Johnson. Bristol-Myers Squibb’s blockbuster drugs, Revlimid, and Eliquis will likely continue to gain market share and aid the company’s near term growth.

Our current price estimate of $68 for Bristol-Myers Squibb translates into 30% upside from the current levels.

For more detailed charts and a timeline of the 2007-08 crisis, view our dashboard analysis 2007-08 vs. 2020 Crisis Comparison: Abbott Stock Compared To S&P 500.

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