How Does Johnson & Johnson Stock Compare With This Large Beverage Company?

We believe that pharmaceutical giant Johnson & Johnson stock  (NYSE: JNJ) and Coca-Cola stock (NYSE: KO) will likely offer similar returns over the next three years. Although these companies are from different sectors, we compare them because they have a similar P/EBIT ratio of around 19x. The decision to invest often comes down to finding the best stocks within the ambit of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. However, from a P/S ratio perspective, Coca-Cola stock is trading at a higher valuation of 6x trailing revenues, compared to around 4x for J&J. This valuation gap is largely justified given Coca-Cola’s superior revenue growth and profitability, as discussed below. If we look at stock returns, both have seen a similar decline of about 3% in the last twelve months, marginally outperforming the returns of the broader S&P500 index, down about 8%. There is more to the comparison, and in the sections below, we discuss the possible returns for JNJ and KO in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation using P/S as a base, in an interactive dashboard analysis of Coca-Cola vs. Johnson & Johnson: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Coca-Cola’s Revenue Growth Is Better

• Both companies posted sales growth over the recent quarters. Still, Coca-Cola’s revenue growth of 12% is higher than around 1% for J&J.
• If we look at a longer time frame, both companies have seen their revenue rise at a similar pace. While Coca-cola saw its sales rise at an average annual growth rate of 4.8% to $38.7 billion in 2021, vs. $34.3 billion in 2018, J&J’s saw its revenue grow at an average rate of 5.1% to $94.9 billion in 2022, compared to $82.0 billion in 2019. Note that Coca-Cola will release its Q4 and full-year 2022 results later this week.
• 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%. However, the growth slowed to 1% for both segments in 2022. This can partly be attributed to lower contribution from the Covid-19 vaccine and falling sales for Remicade, which now faces biosimilar competition.
• J&J’s pharmaceuticals business is likely to benefit from market share gains for its cancer drug – Darzalex – and immunology drugs, Stelara and Tremfya. The company 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.
• For Coca-Cola, both at-home and away-from-home channels have seen growth.
• Strong pricing trends have led Coca-Cola’s revenue growth over the recent quarters.
• After Covid-19 induced lockdowns, the recovery has been swift for the beverage giant, with more people venturing out to attend events, travel, and dine.
• Our Johnson & Johnson Revenue Comparison and Coca-Cola 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 Coca-Cola’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 Coca-Cola, based on Trefis Machine Learning analysis.
• Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid. Different methods are essential to capture recovery in case of negative impact. For companies negatively impacted by Covid, we consider quarterly revenue recovery trajectory to forecast recovery to pre-Covid revenue run rate, and beyond the recovery point, we apply average annual growth observed in the three  years before Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weighting  to growth during Covid and the last 12 months.

2. Coca-Cola Is More Profitable

• Coca-Cola’s operating margin of 31.3% over the last twelve-month period is better than 24.9% for J&J.
• This compares with 36.2% and 24.1% figures in 2019, before the pandemic, respectively.
• Coca-Cola’s free cash flow margin of 27.1% is also better than 22.5% for J&J.
• Our Johnson & Johnson Operating Income Comparison and Coca-Cola Operating Income Comparison dashboards have more details.
• Looking at financial risk, both are comparable. Coca-Cola’s 15% debt as a percentage of equity is slightly better than 16% for J&J, while its 14% cash as a percentage of assets is somewhat lower than 17% for J&J, implying that Coca-Cola has a better debt position, but J&J has more cash cushion.

3. The Net of It All

• We see that Coca-Cola 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 Coca-Cola 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 7% for Coca-Cola over this period vs. an 8% expected return for J&J, implying that investors can pick either of the two for similar returns, based on Trefis Machine Learning analysis – Coca-Cola vs. Johnson & Johnson– which also provides more details on how we arrive at these numbers.

While KO and JNJ 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.

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 2/6/2023
[2] Cumulative total returns since the end of 2016

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