Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?

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JNJ: Johnson & Johnson logo
JNJ
Johnson & Johnson

Johnson & Johnson (NYSE: JNJ) currently trades around $160 per share, 15% below its peak level of over $185 seen in April 2022, and it seems like it can see higher levels over time. JNJ stock was trading at around $180 in June 2022, just before the Fed started increasing rates, and is still 11% below that level. This compares with a 35% rise in the broader S&P 500 index over the same period. Talc lawsuits and patent expiry of some of its drugs weighed on the stock in recent years.

Looking at a slightly longer term, JNJ stock has seen little change, moving slightly from levels of $155 in early January 2021 to around $160 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. Overall, the performance of JNJ stock with respect to the index has been quite volatile. Returns for the stock were 9% in 2021, 3% in 2022, and -11% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — 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 ABBV, 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 some room for growth. We estimate Johnson & Johnson’s Valuation to be $180 per share, reflecting over 10% upside from its current levels of $158. Our forecast is based on a 17x P/E multiple for JNJ and expected earnings of $10.70 on a per-share and adjusted basis for the full year 2024. The 17x P/E multiple aligns with the average value over the last five years.

Our detailed analysis of Johnson & Johnson’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock
Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
  • April 2021: Inflation rates cross 4% and increase rapidly.
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
  • Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024

In contrast, here’s how JNJ stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Johnson & Johnson and S&P 500 Performance During 2007-08 Crisis

JNJ stock declined from $66 in September 2007 to $50 in March 2009 (as the markets bottomed out). It recovered after the 2008 crisis to levels of around $64 in early 2010, rising over 29% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 (pre-crisis peak) to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Johnson & Johnson’s Fundamentals Over Recent Years

Johnson & Johnson’s revenue increased to $85.2 billion in 2023, compared to $78.7 billion in 2021, led by a 6% rise in its pharmaceuticals business and a 12% rise in the medical devices business. The multiple myeloma treatment – Darzalex and the autoimmune drug – Stelara – have been the key growth drivers for the company’s pharmaceuticals business in the recent past. Some of the company’s new drugs, including Carvykti – a multiple myeloma treatment, and Spravato – an antidepressant – have been gaining market share. The growth in its medical devices business can partly be attributed to the Abiomed acquisition, which was closed in December 2022. It accounted for nearly 5% of the total 12% rise for the segment in 2023. Johnson & Johnson’s reported net income expanded 2x in 2023. Our dashboard — What Drove Net Income Change For Johnson & Johnson – has more details. The company’s earnings stood at $14.60 on a per-share and reported basis in 2023, compared to the $7.93 figure in 2021. On an adjusted basis, earnings were $9.92 in 2023, versus $9.80 in 2021.

Does Johnson & Johnson Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Johnson & Johnson’s total debt decreased from $33.8 billion in 2021 to $29.3 billion now, while its cash declined from $31.6 billion to $22.9 billion over the same period. The company also garnered $22.8 billion in cash flows from operations in the last twelve months. Given its solid cash cushion, Johnson & Johnson is in a comfortable position to service its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment and rate cuts are likely in the cards, we believe JNJ stock has the potential for more gains once fears of a potential recession are allayed. Although the challenging macroeconomic factors, higher costs, and patent expiry for Stelara are some near-term risk factors, we think much of these are already priced in.

While JNJ stock can see higher levels, 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.

Returns Mar 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 JNJ Return -2% 1% 37%
 S&P 500 Return 0% 7% 129%
 Trefis Reinforced Value Portfolio -2% 2% 626%

[1] Returns as of 3/18/2024
[2] Cumulative total returns since the end of 2016

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