This Pharmaceutical Company Is A Better Pick Over Johnson & Johnson Stock
We think AbbVie stock (NYSE: ABBV) is currently a better pick than its industry peer, Johnson & Johnson stock (NYSE: JNJ), given its better growth prospects. Both companies are comparable in terms of valuation, with AbbVie trading at 4.7x trailing revenues, and J&J trading at 4.6x. A similar valuation for both companies does not make sense, in our view, given that AbbVie has demonstrated better revenue growth and it is more profitable, as we discuss in the sections below.
If we look at stock returns, AbbVie, with 16% returns this year, has fared better than the 3% return for J&J stock and -17% returns for the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss why we believe ABBV is a better pick over JNJ. We compare a slew of factors, such as historical revenue growth, returns, and valuation multiple, in an interactive dashboard analysis of Johnson & Johnson vs. AbbVie: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. AbbVie’s Revenue Growth Is Better
- AbbVie’s revenue growth of 6.7% over the last twelve months is higher than 4.9% for J&J.
- Even if we look at a longer time frame, AbbVie’s sales growth has been better. It rose at an average annual growth rate of 20.6% to $56.2 billion in 2021, compared to $32.8 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.
- J&J is currently in the process of spinning off its consumer healthcare business.
- AbbVie’s revenue growth has been buoyed by its Allergan acquisition in 2020.
- AbbVie is best known for its blockbuster drug – Humira – used to treat rheumatoid arthritis and Crohn’s disease, among others. Humira garnered a whopping $20.7 billion in 2021 sales, reflecting a 4% y-o-y growth. Now, Humira’s biosimilar has already hit the European markets, weighing on the company’s international sales. The biosimilars are expected to enter the U.S. next year, resulting in a likely significant drop in Humira sales over the coming years.
- That said, Humira is prepared to combat this biosimilar impact with its Allergan acquisition in 2020, giving it access to Botox, a multi-billion dollar product. Furthermore, its relatively new drugs – Skyrizi and Rinvoq – used to treat plaque psoriasis and rheumatoid arthritis, are gaining market share. For perspective, these three products garnered $9.3 billion in 2021, reflecting a 94% y-o-y growth. Even if we look at the first nine months of 2022, Skyrizi sales are up a whopping 76% to $3.6 billion, and Rinvoq sales are up 54% to $1.8 billion.
- Our Johnson & Johnson Revenue and AbbVie Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, AbbVie’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 8.6% for AbbVie, compared to a 3.3% 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. AbbVie’s Operating Margin Is Better
- AbbVie’s operating margin of 30.3% over the last twelve months is better than 23.7% for J&J.
- This compares with 39.0% and 24.1% figures seen in 2019, before the pandemic, respectively.
- AbbVie’s free cash flow margin of 40.0% is also better than 22.5% for J&J.
- Our Johnson & Johnson Operating Income and AbbVie Operating Income dashboards have more details.
- Looking at financial risk, J&J is better placed among the two. Its 14.9% debt as a percentage of equity is lower than 26.1% for AbbVie, while its 19.5% cash as a percentage of assets is higher than 7.0% for the latter, implying that J&J has a better debt position and more cash cushion.
3. The Net of It All
- We see that AbbVie has demonstrated better revenue growth and is more profitable. On the other hand, J&J offers a comparatively lower financial risk with its better debt and cash position.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe AbbVie is likely to offer better returns over J&J in 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 21% for AbbVie over this period and a 3% expected return for J&J, implying that investors are likely to be better off picking ABBV over JNJ, based on Trefis Machine Learning analysis – Johnson & Johnson vs. AbbVie – which also provides more details on how we arrive at these numbers.
While ABBV may outperform JNJ in the next three years, 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.
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.
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.
|S&P 500 Return||2%||-17%||76%|
|Trefis Multi-Strategy Portfolio||2%||-21%||213%|
 Month-to-date and year-to-date as of 11/22/2022
 Cumulative total returns since the end of 2016
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