15% Upside For Johnson & Johnson Stock?


Johnson & Johnson’s stock (NYSE: JNJ) lost more than 23% – dropping from $146 at the beginning of the year to below $112 in late March – then spiked 35% to around $150 now. That means it has fully recovered to the levels where it started the year.

Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound, which will bode well for Johnson & Johnson. In addition, the company posted a better than expected Q2, led by steady growth in its Pharmaceuticals business.

But is this all there is to the story?

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Not quite. Despite the recent rally, Trefis estimates Johnson & Johnson’s Valuation at about $176 per share, roughly 17% above the current market price based on two key opportunities.

The first opportunity we see is to Johnson & Johnson’s Revenue growth over the coming years. With the economies gradually opening up and lockdown restrictions being lifted in several cities, the healthcare institutions have begun attending to elective surgeries, which were deferred earlier. This means a gradual increase in hospital visits, number of procedures performed, and higher number of prescriptions issued, boding well for Johnson & Johnson. The company’s 4 important drugs – Imbruvica, Darzalex, Stelara, and Simponi  – are gaining market share, and they will likely garner $22.3 billion in 2021 sales, reflecting a 30% growth since 2019. Looking at Consumer Healthcare business, the sales are expected to grow over the coming years. led by the company’s beauty segment, which should benefit from the acquisitions of DR.CI:LABO, and continued growth in Neutrogena and Aveeno brands. That said, Johnson & Johnson revenues are expected to decline in 2020, primarily due to lower Medical Devices segment sales, amid the deferment of elective surgeries seen in the first half of the year.

The second key opportunity stems from Johnson & Johnson’s valuation multiple compared to its peers. The stock now trades at 19x its projected 2020 adjusted earnings per share of about $7.80. In comparison, to earn close to $8 per year from a bank, you’d have to deposit about $800 in a savings account today (assuming 1% interest rate), so about 100x desired earnings. At Johnson & Johnson’s current share price of roughly $150, we are talking about a P/E multiple of around 19x based on expected 2020 adjusted earnings of $7.80, in-line with the levels of 19x seen in 2017. And we think a figure closer to 23x will be appropriate. While the 23x number appears high compared to levels seen over the recent years, it is due to the fact that 2020 EPS will be lower given the impact of Covid-19. The estimated Non-GAAP EPS of $7.80 in 2020 compares with $8.18 and $8.68 figures seen in 2018 and 2019 respectively. With Medical Devices business expected to see strong growth from next year, and market share gains for some of Johnson & Johnson’s blockbuster drugs, clubbed with margin expansion due to better product mix and cost cutting measures, will result in strong earnings growth over the coming years. In fact, we estimate the 2021 Non-GAAP EPS to be $9.00 per share, and at the current price of $150, JNJ stock is trading at just 17x 2021 (expected) earnings. Also, Johnson & Johnson’s P/E multiple is lower compared to some of its peers, such as Eli Lilly which currently trades at 24x its projected 2020 earnings, while Abbott trades at 31x.

That said, there is a near term risk in the company’s Medical Devices segment.

Given the current Covid-19 pandemic, several elective surgeries were postponed in the first half of the year, resulting in a significant impact on Medical Devices business for Johnson & Johnson. In fact, the company saw a massive 34% dip in Medical Devices segment sales in Q2. However, the situation is changing on the ground with an increase in number of procedures performed as the economies open up. The rebound in economic growth and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting U.S. 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. The complete set of coronavirus impact and timing analyses is available here. For Johnson & Johnson the key trend to watch out for will be the Medical Devices segment sales in Q3, as elective surgeries gain pace over the coming months.

While Johnson & Johnson stock looks like it can gain more, AbbVie appears to have found a way to reduce its reliance on Humira, courtesy of the Allergan acquisition and expansion of its new drugs.

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