Pick Either Johnson & Johnson Stock Or Its Peer – Both May Offer Similar Returns

JNJ: Johnson & Johnson logo
Johnson & Johnson

We believe that pharmaceutical giants Johnson & Johnson stock  (NYSE: JNJ) and Merck stock (NYSE: MRK) will likely offer similar returns over the next three years. Both companies are trading at a similar valuation of around 5.0x trailing revenues. If we look at stock returns, Merck, with a stellar 37% rise in the last twelve months, has fared far better than J&J, up just 3%, and both have outperformed the broader S&P 500 index, down 15%. There is more to the comparison, and in the sections below, we discuss the possible returns for JNJ and MRK 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. MerckWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Merck’s Revenue Growth Is Better

  • Both companies posted sales growth over the last twelve months. Still, Merck’s revenue growth of 27.8% is higher than 5.0% for J&J.
  • Even if we look at a longer time frame, Merck fares better, with its sales rising at an average annual growth rate of 5.3% to $48.7 billion in 2021 vs. $42.3 billion in 2018, while J&J’s saw its revenue rise 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 as a separately traded company – Kenvue – which has already filed for an IPO.
  • Merck, over the recent years, has benefited from the label expansion of Keytruda and strong demand for vaccines, primarily Gardasil. Both of these products are seeing strong demand, with sales rising 23% y-o-y to $15.5 billion for Keytruda and a 31% uptick to $5.4 billion for Gardasil for the nine months ending Sep 2022. Both of these are expected to continue driving revenue growth for Merck.
  • Our Johnson & Johnson Revenue Comparison and Merck Revenue Comparison 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 Merck’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 1.6% CAGR for Merck, 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. Merck Is More Profitable

  • Merck’s operating margin of 30.7% over the last twelve-month period is slightly better than 24.1% for J&J.
  • This compares with 36.2% and 24.1% figures in 2019, before the pandemic, respectively.
  • Merck’s free cash flow margin of 33.5% is also better than 24.8% for J&J.
  • Our Johnson & Johnson Operating Income Comparison and Merck Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Merck’s 10.7% debt as a percentage of equity is better than 15.1% for J&J, while its 11.4% cash as a percentage of assets is lower than the 16.9% for J&J, implying that Merck has a better debt position, but J&J has more cash cushion.

3. The Net of It All

  • We see that Merck has demonstrated better revenue growth, is more profitable and has a better debt position. On the other hand, J&J 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 Merck 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 and points to an expected return of 8% for Merck over this period vs. an 11% expected return for J&J stock, implying that investors can pick either of the two for similar returns, based on Trefis Machine Learning analysis – Johnson & Johnson vs. Merck– which also provides more details on how we arrive at these numbers.

While JNJ and MRK may offer similar returns 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% in the last twelve months. 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.

Returns Jan 2023
MTD [1]
YTD [1]
Total [2]
JNJ Return -2% -2% 51%
MRK Return 1% 1% 90%
S&P 500 Return 4% 4% 78%
Trefis Multi-Strategy Portfolio 8% 8% 239%

[1] Month-to-date and year-to-date as of 1/13/2023
[2] Cumulative total returns since the end of 2016

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