Buy, Sell, Or Hold Johnson & Johnson Stock At $140?

Johnson & Johnson (NYSE: JNJ) stock has declined 2% since the beginning of this year (through April 8), compared to a 15% decline for the broader S&P 500. Despite this outperformance, we believe that Johnson & Johnson’s stock has a significant upside from the current levels of around $140.  The key is Johnson & Johnson’s stock is up only 9% since the start of 2018, a little over two years ago. Our dashboard, ‘What Factors Drove 9.1% Change In Johnson & Johnson Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

The stock price didn’t gain over the past two years despite steady revenue growth for the company. Johnson & Johnson’s revenues were up 7.3% from 2017 to 2019. This combined with a 9x jump in net income margin from (a depressed) 1.7% in 2017 to 18.4% in 2019, and a reduction in share count due to stock repurchases worth $19 billion, helped earnings per share swell 1092% (from low levels). Note that these numbers are based on Johnson & Johnson’s GAAP numbers. The reason for the low margin in 2017 was tax provisions of $16.3 billion, as compared to $3.3 billion in the prior year. This can be attributed to the impact of changes in the U.S. tax laws. This led to lower EPS in 2017, thus swelling the EPS growth. For comparison, on an adjusted basis, Johnson & Johnson’s EPS grew 19% between 2017 and 2019. Notably, Johnson & Johnson has about $20 billion in cash as of the last report, and the company will very likely continue to buy back shares under a new repurchase program.

A sizable drop in Johnson & Johnson’s P/E multiple (back to more normalized levels) has largely mitigated the rise in the company’s earnings. Johnson & Johnson’s P/E multiple dropped from 274x (again due to the changes in tax law, GAAP EPS figure was low, thus swelling the P/E ratio) at the end of 2017 to 25.3x by the end of 2019. Moreover, Johnson & Johnson’s P/E is down to about 24x now, given the volatility of the current situation. This reflects a 91% decrease in P/E multiple from December 2017 to March 2020. Some of the decline in the P/E multiple can also be attributed to the increasing litigation expenses for the company. Johnson & Johnson’s litigation expenses were $955 million in 2017, $1.7 billion in 2018, and $4.0 billion in 2019, though we expect the figure to be lower in 2020. We believe there is a potential upside for Johnson & Johnson’s multiple when compared to levels seen over recent years – P/E of 25x at the end of 2019, and 24x currently.

How Is Coronavirus Impacting Johnson & Johnson Stock?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact Johnson & Johnson revenues as it faces supply chain disruptions, and potential impact on direct sales due to postponement of minor health related issues and surgeries. Between January 31st and April 6th, Johnson & Johnson stock has lost 5% of its value (vs. about a 17% decline in the S&P 500). A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Notably, the company derives a bulk of its revenues from the US, which has become the new epicenter of the outbreak, with the country recording the largest numbers of COVID-19 cases across the globe. The outperformance of Johnson & Johnson stock in the current crisis can partly be attributed to its work on a vaccine for COVID-19, which could be a growth driver in 2021 and beyond. Biomedical Advanced Research and Development Authority (BARDA) has funded Johnson & Johnson’s COVID-19 vaccine for clinical trials.

In the near term, though, revenues are likely to be impacted by the ongoing crisis. We believe Johnson & Johnson’s Q1 results next week will confirm the trend in revenues. It is also likely to accompany lower guidance for the full year. Going by historical trends, we believe that the company’s stock is currently oversold and offers potential upside returns.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams