We believe that Pfizer stock (NYSE: PFE) is currently a better pick than its peer, Johnson & Johnson stock (NYSE: JNJ), given its relatively lower valuation of 3.1x trailing revenues, compared to 4.9x for J&J. We think that this valuation gap should narrow, given Pfizer’s better revenue growth and profitability, as discussed below.
If we look at stock returns, J&J’s 5% growth this year is better than a -8% return for Pfizer and -16% returns for the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss why we believe PFE stock will offer better returns than JNJ stock 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 Pfizer vs. Johnson & Johnson: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Pfizer’s Revenue Growth Is Better
- Both companies posted sales growth over the last twelve months. Still, Pfizer’s revenue growth of 44.5% is much higher than just 5.0% for J&J.
- Even if we look at a longer time frame, Pfizer fares better, with its revenue rising at an average annual rate of 32.2% to $81.3 billion in 2021, compared to $40.8 billion in 2018, while J&J saw its revenue rise at an average annual rate of just 4.9% to $93.8 billion in 2021, compared to $81.6 billion in 2018.
- Pfizer’s sales over the recent years were primarily driven by a very high demand for the Covid-19 vaccine. However, the demand for Covid-19 vaccines is also declining with a rise in the global vaccination rate. This will likely weigh on Pfizer’s revenue growth over the coming years. The revenue growth in 2022, though, will be bolstered by its Covid-19 antiviral pill sales.
- 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%.
- Looking at nine months period ending Sep 2022, medical devices sales were up 3.3% while pharmaceutical saw 5.2% growth. Both segments are expected to continue to see steady growth going forward.
- The company’s pharmaceuticals growth is driven by market share gains for its blockbuster drugs, Darzalex, Stelara, and Tremfya.
- J&J is currently in the process of spinning off its consumer healthcare business.
- Our Pfizer Revenue Comparison and Johnson & Johnson Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, revenue for J&J is expected to grow slightly faster over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 1.6% for Pfizer and 3.3% for J&J, 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 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.
2. Pfizer Is More Profitable
- Pfizer’s operating margin of 33.6% over the last twelve-month period is better than 24.1% for J&J.
- This compares with 36.2% and 24.1% figures seen in 2019, before the pandemic, respectively.
- Pfizer’s free cash flow margin of 26.6% is slightly better than 24.8% for J&J.
- Our Pfizer Operating Income Comparison and Johnson & Johnson Operating Income Comparison dashboards have more details.
- Looking at financial risk, Pfizer’s 12.0% debt as a percentage of equity is slightly lower than 14.6% for J&J, while its 0.7% cash as a percentage of assets is lower than 16.9% for the latter, implying that Pfizer has a better debt position, but J&J has more cash cushion.
3. The Net of It All
- We see that Pfizer has demonstrated better revenue growth, is more profitable, has a better debt position, and is available at a comparatively lower valuation. 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 Pfizer is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for Pfizer and J&J over the next three years and points to an expected return of 25% for Pfizer over this period vs. a 6% expected return for J&J stock, implying that investors are better off buying PFE over JNJ, based on Trefis Machine Learning analysis – Pfizer vs. Johnson & Johnson– which also provides more details on how we arrive at these numbers.
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 Xylem vs. Merck.
With higher inflation and the Fed raising interest rates, among other factors, Pfizer stock has seen an 8% fall this year. Can it drop more? See how low Pfizer stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||-2%||-16%||78%|
|Trefis Multi-Strategy Portfolio||-1%||-18%||230%|
 Month-to-date and year-to-date as of 12/15/2022
 Cumulative total returns since the end of 2016