Is Johnson & Johnson Stock A Better Pick Over AbbVie?

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Johnson & Johnson

We believe that the pharmaceuticals bellwether Johnson & Johnson (NYSE: JNJ) is currently a better pick over its peer AbbVie (NYSE: ABBV). AbbVie trades at a higher valuation of 5.5x trailing revenues, compared to 4.6x for JNJ. However, we think that this valuation gap will likely narrow over the coming years in favor of JNJ, given its superior revenue growth and profitability in recent years.

The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. In the sections below, we discuss why we think JNJ will outperform ABBV in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

Firstly, looking at stock returns, ABBV stock has seen strong gains of 60% from levels of $105 in early January 2021 to around $170 now, versus a little change for JNJ, moving slightly from levels of $155 to $152 over the same period. This compares with an increase of about 35% for the S&P 500 over this roughly three-year period.

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Overall, the performance of JNJ and ABBV stocks with respect to the index has been far from consistent. Returns for JNJ stock were 9% in 2021, 3% in 2022, and -11% in 2023, while the returns for ABBV stock were 26%, 19%, and -4%, in 2021, 2022, and 2023, respectively. In comparison, the S&P 500 surged 27% in 2021, but it fell by 19% in 2022, and rose by 24% in 2023. This indicates that both JNJ and ABBV 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.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could JNJ and ABBV face a similar situation as they did in 2021 and 2023 and underperform the S&P over the next 12 months — or will they see a strong jump? We expect both stocks to see higher levels in the next three years, but JNJ will likely fare better over AbbVie.

1. J&J’s Revenue Growth Is Better

  • J&J’s revenue growth has been better, with its sales rising 8.2% since 2021, compared to a 3.3% decline for AbbVie’s revenues.
  • The revenue growth for J&J was led by a 6% rise in its pharmaceuticals business and a 12% rise in the medical devices business between 2021 and 2023.
  • 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.
  • AbbVie is best known for its blockbuster drug – Humira – used to treat rheumatoid arthritis and Crohn’s disease, among others. However, Humira now faces biosimilar competition, and its sales plunged 32% y-o-y to $14.4 billion in 2023.
  • AbbVie, to some extent, can combat the loss of revenue from Humira by market share gains for some of its relatively new drugs, primarily Skyrizi and Rinvoq. These drugs are used to treat plaque psoriasis and rheumatoid arthritis. For perspective, these two products garnered $11.7 billion in 2023, reflecting a solid 53% y-o-y growth.
  • Moreover, AbbVie is also looking at inorganic growth. It acquired Allergan in 2020, and earlier this year, it acquired ImmunoGen for $10.1 billion, giving it rights to Elahere — an ovarian cancer treatment – with estimated peak sales of over $2 billion.
  • If we look at the last twelve-month period, J&J has fared much better, with sales growth of 6.5% vs. -6.4% for AbbVie.
  • Our AbbVie Revenue Comparison dashboard provides more insight into the company’s sales.
  • Looking forward, both AbbVie’s and J&J’s sales are expected to rise at a mid-single-digit average rate over the next few years.

2. J&J Is More Profitable 

  • J&J’s operating margin has slid slightly from 26.6% in 2021 to 25.8% in 2023, while AbbVie’s operating margin declined from 33.9% to 24.9% over this period.
  • Looking at the last twelve-month period, J&J’s operating margin of 26.6% fares better than 24.9% for AbbVie.
  • Much of the changes in margin metrics were visible in 2023. The overall net income fell by nearly 60% y-o-y for AbbVie, in 2023. Our dashboard – What Drove the Net Income Change for AbbVie in FY2023? — has more details.
  • Looking at financial risk, J&J fares better, with its 8% debt as a percentage of equity lower than 20% for AbbVie. Furthermore, J&J’s 14% cash as a percentage of assets is higher than 10% for the latter, implying that J&J has a better debt position and more cash cushion.

3. The Net of It All

  • We see that J&J has demonstrated better revenue growth, is more profitable, and has a better financial position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe JNJ is the better choice of the two, given its lower valuation and better prospects.
  • If we compare the current valuation multiples to the historical averages, JNJ fares better, with its stock currently trading at 4.6x trailing revenues vs. the last four-year average of 5.4x. In contrast, ABBV stock trades at 5.5x trailing revenues, vs. the last four-year average of 4.5x.
  • Overall, AbbVie is combating to cut its losses from the decline in Humira sales with its acquisitions and new drugs. It appears that it will be able to grow its revenues over the coming years, despite a significant fall in Humira. On the other hand, J&J will benefit from market share gains for Darzalex, and continued momentum for its medical devices business, given the rise in elective surgeries lately. That said, the growth for J&J will be capped as it nears generic competition for its top-selling drug – Stelara.
  • Still, J&J’s attractive valuation in comparison to AbbVie at its own historical average makes it a better pick, in our view.

While JNJ may outperform ABBV 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.

Returns Apr 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 JNJ Return -4% -3% 32%
 ABBV Return -8% 8% 168%
 S&P 500 Return -2% 8% 130%
 Trefis Reinforced Value Portfolio -3% 4% 636%

[1] Returns as of 4/5/2024
[2] Cumulative total returns since the end of 2016

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