Johnson & Johnson (NYSE: JNJ) reported its Q3 results last week, with revenues and earnings beating the street estimates. However, we believe that JNJ stock has little room for growth, as discussed below. The company reported revenue of $21.4 billion, reflecting 6.8% growth from the prior year period and above the $21.0 billion street estimate. Its adjusted earnings of $2.66 per share were up 19% y-o-y and above the consensus estimate of $2.52 per share. In this note, we discuss Johnson & Johnson’s stock performance, key takeaways from its recent results, and valuation.
JNJ stock has seen little change, moving slightly from levels of $155 in early January 2021 to around $150 now, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. Overall, the performance of JNJ stock with respect to the index has been lackluster. Returns for the stock were 9% in 2021, 3% in 2022, and -14 % in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 10% in 2023 (YTD) – indicating that JNJ underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Health Care sector, including LLY, UNH, and MRK, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could JNJ face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, JNJ stock looks like it has little room for growth. We estimate Johnson & Johnson’s Valuation to be $159 per share, reflecting only a 5% upside from its current levels of $151. Our forecast is based on a 15x P/E multiple for JNJ and expected earnings of $10.13 on a per-share and adjusted basis for the full year 2023. The company raised its earnings outlook to now be in the range of $10.07 and $10.13 (vs. the $10.00 and $10.10 range earlier).
Johnson & Johnson’s revenue of $21.4 billion in Q3 was up 7% y-o-y. The company reported a 5% rise in Innovative Medicine (pharmaceuticals business) and a 10% growth for its MedTech (medical devices business). The multiple myeloma treatment – Darzalex and the autoimmune drug – Stelara – have been the key growth drivers for the company in the recent past. However, Stelara lost market exclusivity this year. The company saw its adjusted net income margin expand 200 bps y-o-y to 31.7%. Higher revenues and margin expansion led to a 19% y-o-y rise in the bottom line to $2.66 on a per-share and adjusted basis in Q3’23.
JNJ stock is trading at 4.2x sales compared to the last five-year average of 4.9x, implying little room for growth. We believe investors will likely be better off waiting for a dip to enter JNJ for better gains in the long run. Challenging macroeconomic factors, higher costs, and patent expiry for Stelara are some risk factors that could cap JNJ’s growth in the near term.
While JNJ stock looks like it has little room for growth, 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.
|S&P 500 Return||-2%||10%||88%|
|Trefis Reinforced Value Portfolio||-3%||19%||514%|
 Month-to-date and year-to-date as of 10/24/2023
 Cumulative total returns since the end of 2016