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 30% to around $145 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. The opening up of economies, and resumption of elective procedures, will bode well for Johnson & Johnson. In addition, the company posted a better than expected Q3, 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 $178 per share, roughly 23% above the current market price based on two key opportunities and a near term risk.
The first opportunity we see is to Johnson & Johnson’s Revenue growth over the coming years. Now that lockdown restrictions are being lifted in most of the 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 3 important drugs – Imbruvica, Darzalex, and Stelara – are gaining market share, and they will likely garner over $20 billion in 2022 sales, reflecting a strong 60% growth since 2019.
The second key opportunity stems from Johnson & Johnson’s valuation multiple compared to its peers. The stock now trades at 18x its projected 2020 adjusted earnings per share of about $8.01. 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 $145, we are talking about a P/E multiple of around 18x based on expected 2020 adjusted earnings of $8.01, lower than the levels of 19x seen in 2017. And we think a figure closer to 22x will be appropriate. While the 22x 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 $8.01 in 2020 compares with $8.18 and $8.68 figures seen in 2018 and 2019 respectively. With the company’s businesses expected to see steady 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 $9.02 per share, and at the current price of $145, JNJ stock is trading at just 16x 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 20x its projected 2020 earnings, while Abbott trades at 33x.
That said, there is a near term risk in the company’s Medical Devices segment.
Given the current Covid-19 pandemic, several types of elective surgeries were postponed in the first half of the year, resulting in a significant impact on the 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 improved in Q3 with economies gradually opening up, and the segment sales were down only 3.6% (y-o-y) in Q3. Seeing the recovery, Johnson & Johnson also raised its earnings guidance for the full year to be in the range of $7.95 to $8.05 on an adjusted and per-share basis, compared to the earlier provided range of $7.75 and $7.95.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.