Is Johnson & Johnson Stock A Better Pick Over Its Peer?

We believe Johnson & Johnson stock  (NYSE: JNJ) is currently a better pick than Eli Lilly stock (NYSE: LLY), given its better prospects. Although Eli Lilly is trading at a comparatively higher valuation of 11.8x trailing revenues than 4.8x for J&J, this gap in the valuation to some extent is justified given Eli Lilly’s superior revenue growth, profitability, and a solid pipeline, as discussed below.

If we look at stock returns, Eli Lilly, with a stellar 34% rise this year, has fared far better than J&J, up just 4%, and both have outperformed the broader S&P 500 index, down 14%. There is more to the comparison, and in the sections below, we discuss why we believe JNJ stock will offer better returns than LLY stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Johnson & Johnson vs. Eli Lilly: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Eli Lilly’s Revenue Growth Is Better

• Eli Lilly’s revenue growth of 5.3% over the last twelve months is in line with the 5.0% growth for J&J.
• However, if we look at a longer time frame, Eli Lilly fares better, with its sales rising 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 9.7% to $28.3 billion in 2021, compared to $21.5 billion in 2018. In comparison,  J&J’s sales rose at an average rate of 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 drug – Darzalex – and immunology drugs, Stelara and Tremfya.
• J&J is currently in the process of spinning off its consumer healthcare business.
• Eli Lilly’s revenue growth has been driven by continued market share gains for drugs such as Trulicity, Verzenio, Jardiance, and its Covid-19 antibodies. The company recently secured U.S. FDA approval for its diabetes drug – Tirzepatide – which is expected to garner over $5 billion in peak sales.
• Eli Lilly has a robust product cycle, including Alzheimer’s treatment – Donanemab – one of the most anticipated drugs with peak sales pegged as high as $10 billion.
• The company recently reported positive data from late-stage clinical trials for Donanemab, with the drug meeting a study’s primary and secondary endpoints. ^[1]
• Our Johnson & Johnson Revenue and Eli Lilly Revenue dashboards provide more insight into the companies’ sales.
• Looking forward, J&J’s revenue growth over the next three years is expected to be slightly better than Eli Lilly’s. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 3.3% for J&J, compared to a 2.0% CAGR for Eli Lilly, 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.

2. Eli Lilly Is More Profitable

• Eli Lilly’s operating margin of 25.0% over the last twelve-month period is slightly better than 23.7% for J&J.
• This compares with 21.8% and 24.1% figures in 2019, before the pandemic, respectively.
• Eli Lilly’s free cash flow margin of 26.2% is slightly better than 24.8% for J&J.
• Our Johnson & Johnson Operating Income Comparison and Eli Lilly Operating Income Comparison dashboards have more details.
• Looking at financial risk, Eli Lilly’s 5.8% cash as a percentage of assets is much lower than the 16.9% for J&J, implying that J&J has more cash cushion.

3. The Net of It All

• We see that Eli Lilly has demonstrated better revenue growth and is more profitable. On the other hand, J&J is trading at a comparatively lower valuation 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 J&J is currently the better choice.
• The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 5% for J&J over this period and a -17% expected return for Eli Lilly stock, implying that investors will likely be better off buying JNJ over LLY, based on Trefis Machine Learning analysis – Johnson & Johnson vs. Eli Lilly – which also provides more details on how we arrive at these numbers.

While JNJ may outperform LLY 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.

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.

[1] Month-to-date and year-to-date as of 12/2/2022
[2] Cumulative total returns since the end of 2016

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1. Eli Lilly’s Press Release, Nov 30, 2022 [↩]