Pick Either Johnson & Johnson Stock Or This Healthcare Company – Both Are Likely To Offer Similar Returns

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JNJ: Johnson & Johnson logo
JNJ
Johnson & Johnson

We believe that healthcare companies Abbott stock (NYSE: ABT) and Johnson & Johnson stock (NYSE: JNJ) are likely to offer similar returns over the next three years. Although ABT is trading at a comparatively lower valuation of 4.0x, trailing revenues vs. 4.5x for J&J, this gap in the valuation is justified given J&J’s superior profitability and lower financial risk, as discussed below.

If we look at stock returns, Abbott, with -24% returns this year, has fared worse than the -3% return for J&J stock and -16% returns for the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss the possible stock returns for ABT and JNJ in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Abbott vs. Johnson & JohnsonWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Abbott’s Revenue Growth Is Better

  • Abbott’s revenue growth of 13.2% over the last twelve months is higher than 7.2% for J&J.
  • Even if we look at a longer time frame, Abbott’s sales growth has been better. It rose at an average annual growth rate of 12.4% to $43.1 billion in 2021, compared to $30.6 billion in 2018, while J&J’s saw its revenue rise at an average annual rate of just 4.9% to $93.8 billion in 2021, compared to $81.6 billion in 2018.
  • While J&J’s medical devices business faced headwinds in 2020 due to the pandemic’s impact, it rebounded in 2021.
  • The pharmaceuticals segment saw a 14% rise in 2021 sales, and the medical devices segment sales were up 18%. The strong performance from both segments is expected to continue going forward.
  • 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.
  • Abbott’s sales growth over the recent years was driven by a very high demand for Covid-19 testing. However, with the decline in Covid-19 cases, the demand for testing is also falling, weighing on Abbott’s diagnostics business.
  • That said, the company’s medical devices and established pharmaceutical sales will likely see steady growth over the coming years.
  • Our Johnson & Johnson Revenue and Abbott Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Abbott’s revenue is expected to grow faster than J&J’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 4.1% for Abbott, compared to a 3.6% CAGR for J&J, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. J&J And Abbott Have Similar Margins

  • J&J’s operating margin of 23.9% over the last twelve months is in line with 23.6% for Abbott.
  • This compares with 24.1% and 16.1% figures seen in 2019, before the pandemic, respectively.
  • J&J’s free cash flow margin of 24.4% is better than 22.5% for Abbott.
  • Our Johnson & Johnson Operating Income and Abbott Operating Income dashboards have more details.
  • Looking at financial risk, both seem comparable. J&J’s 15.6% debt as a percentage of equity is higher than 8.9% for Abbott, while its 13.3% cash as a percentage of assets is higher than 12.5% for the latter, implying that Abbott has a better debt position and J&J has more cash cushion.

3. The Net of It All

  • We see that Abbott has demonstrated better revenue growth, has a better debt position, and is available at a comparatively lower valuation. On the other hand, J&J is slightly more profitable and has more cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both Abbott and J&J are likely to offer similar returns over the next three years.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 14% for Abbott over this period and a 10% expected return for J&J, implying that investors can pick either of the two for similar returns, based on Trefis Machine Learning analysis – Abbott vs. Johnson & Johnson – which also provides more details on how we arrive at these numbers.

While JNJ and ABT stocks look like they are likely to offer similar returns, 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 at how counter-intuitive the stock valuation is for Amedisys vs. Amerco.

With higher inflation and the Fed raising interest rates, JNJ has seen a fall of 3% this year. Can it drop further? 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.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Sep 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
ABT Return 4% -24% 179%
JNJ Return 3% -3% 44%
S&P 500 Return 1% -16% 79%
Trefis Multi-Strategy Portfolio 2% -14% 241%

[1] Month-to-date and year-to-date as of 9/9/2022
[2] Cumulative total returns since the end of 2016

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