After a 3% rise year-to-date, at the current levels, we believe Johnson & Johnson stock (NYSE: JNJ) has only a little room left for growth. JNJ stock rose from $172 in early January to $177 now. The YTD 3% return for JNJ marks an outperformance with -20% returns for the broader S&P500 index.
Looking at the longer term, JNJ stock is up 38% from levels seen in late 2018. This marks an outperformance compared to some of its peers, with Pfizer stock rising 24% and Merck stock up 28%. However, the returns for some of the large pharmaceutical companies were lower than that of the broader markets, with the S&P 500 index rising 54% over the same period.
This 38% rise for JNJ stock since late 2018 was driven by: 1. Johnson & Johnson’s revenue, which grew 16% to $94.9 billion over the last twelve months, compared to $81.6 billion in 2018, 2. the company’s P/S ratio, which rose 17% to 4.9x trailing revenues, from 4.2x in 2018, and 3. a 2% fall in its total shares outstanding to 2.6 billion currently. This means the company’s revenue per share rose 18% to $36.05 now, compared to $30.42 in 2018.
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While J&J’s medical devices business faced headwinds in 2020 due to the pandemic’s impact, it rebounded in 2021. The company’s pharmaceuticals business is seeing strong growth led by market share gains for its cancer drugs, Imbruvica and Darzalex, and immunology drugs, Stelara and Tremfya. The pharmaceuticals segment saw a 14% rise in 2021 sales, and the medical devices segment sales were up 18%. The strong performance from both the segments is expected to continue going forward, with an expected increase in total procedure volume. J&J has a solid pharmaceuticals pipeline with potential peak sales of over $15 billion, and this should bolster the sales growth over the coming years.
J&J’s consumer healthcare business has seen slower growth, rising just 4% in 2021. The segment sales have remained in a tight range of $13.3 billion to $14.7 billion over the last decade. J&J last year announced its plans to spin off its consumer healthcare business, allowing the company to focus on more lucrative pharmaceutical and medical devices businesses. Furthermore, it is the consumer healthcare business with a higher risk from legal issues pertaining to the talc powder. This move to spin off this business makes sense for J&J, making the stock more attractive.
While the company has strong prospects, it faces headwinds from the current weakness in broader markets. The S&P500 has now entered the bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. However, we estimate Johnson & Johnson’s valuation to be $195 per share, reflecting a 10% upside from its current market price of $177, implying that there is only a little room left for growth. Our valuation is based on a forward P/E ratio of around 19x based on our earnings forecast of $10.30 on a per-share basis for full-year 2022. This compares with an average of 17x seen over the last three years.
While JNJ stock has only a little room for growth, it is helpful to see how Johnson & Johnson’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 how counter-intuitive the stock valuation is for IDEXX Laboratories vs. Entegris.
Despite higher inflation and the Fed raising interest rates, JNJ has seen a rise of 3% this year. But can it drop from here? See how low Johnson & Johnson stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||-8%||-20%||71%|
|Trefis Multi-Strategy Portfolio||-7%||-25%||196%|
 Month-to-date and year-to-date as of 6/30/2022
 Cumulative total returns since the end of 2016