Johnson & Johnson (JNJ) is New Brunswick, N.J. researches, develops, manufactures, and sells a range of products in the healthcare field. It operates through the Consumer; Pharmaceutical; and Medical Devices segments. In contrast, headquartered in Cambridge, U.K., AstraZeneca PLC (AZN) is a patient-focused biopharmaceutical company. It engages in discovering, developing, manufacturing, and marketing prescription medicines. The company is focused on three main therapy areas: Oncology; Cardiovascular, Renal & Metabolism; and Respiratory & Immunology.
Drug manufacturers have been in the spotlight since the onset of the COVID-19 pandemic, developing therapies and vaccines to protect humans from the deadly virus. This, along with increased lifestyle-related diseases, has helped drug manufacturers significantly increase their revenues. The per capita growth in health care expenditure has beaten personal consumption growth in the U.S. since 1980. Despite the current inflationary pressure, it is difficult for people to reduce their healthcare expenditures. The rapidly aging population is also expected to increase the demand for medicines, which bodes well for drug manufacturers.
JNJ stock has gained 0.8% in price over the past three months, while AZN has gained 8.5%. AZN is the clear winner with 6.3% gains year-to-date versus JNJ’s 2% gains.
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Which is a better stock to buy now? Let’s find out.
Latest Developments
On Nov. 12, 2021, JNJ announced its intention to separate its Consumer Health business by creating a new publicly traded company. JNJ’s Executive Chairman Alex Gorsky said, “For the new Johnson & Johnson, this planned separation underscores our focus on delivering industry-leading biopharmaceutical and medical device innovation and technology with the goal of bringing new solutions to market for patients and healthcare systems, while creating sustainable value for shareholders.”
On Jan.13, 2022, AZN announced that it had signed a collaboration agreement with Scorpion Therapeutics to discover, develop, and commercialize precision medicines against previously hard-to-target cancer proteins, potentially transforming oncology treatment. The collaboration focuses on a class of proteins called transcription factors, which control gene expression and regulate important cellular processes, including cell growth and survival.
Recent Financial Results
JNJ’s reported sales increased 10.4% year-over-year to $24.80 billion for the fourth quarter, ended Dec. 31, 2021. The company’s adjusted net earnings increased 14.4 year-over-year to $5.67 billion. Also, its adjusted EPS came in at $2.13, representing a 14.5% increase year-over-year.
AZN’s total revenue increased 62% year-over-year to $12.01 billion for the fourth quarter, ended Dec.31, 2021. The company’s loss after tax came in at $346 million, compared to the profit after tax of $1 billion in the year-ago period. Also, its loss per share was $0.22, compared to an EPS of $0.78 in the year-ago period. In addition, its EBITDA declined 8.7% year-over-year to $7.58 billion.
Past and Expected Financial Performance
JNJ’s revenue and EBITDA have grown at CAGRs of 4.7% and 5.1%, respectively, over the past three years. Analysts expect JNJ’s revenue to increase 6.2% in the current year and 2.3% next year. The company’s EPS is expected to grow 1.2% in the current quarter, 7.4% in the current year, and 4.8% next year. Furthermore, its EPS is expected to grow at a 6% rate per annum over the next five years.
AZN’s revenue and EBITDA have grown at CAGRs of 19.2% and 23.3%, respectively, over the past three years. Analysts expect the company’s revenue to increase 16.9% in the current year and 5.8% next year. AZN’s EPS is expected to grow 2.4% in the current quarter, 21.1% in the current year, and 18.7% next year. AZN’s EPS is expected to grow at a 15.7% rate per annum over the next five years.
Profitability
JNJ’s trailing-12-month revenue is 2.50 times AZN’s. JNJ is also more profitable, with EBITDA and net income margins of 34.80% and 22.26%, respectively, compared to AZN’s 22.38% and 0.30%.
Further, JNJ’s ROCE, ROTC, and ROA of 30.41%, 15.14%, and 11.47%, respectively, are higher than AZN’s 0.41%, 5.19%, and 0.11%.
Valuation
In terms of forward EV/S, AZN is currently trading at 4.96x, which is 5.9% higher than JNJ’s 4.68x. And AZN’s 14.63x EV/EBITDA ratio is 11.4% higher than JNJ’s 13.13x.
So, JNJ is relatively affordable here.
POWR Ratings
JNJ has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. In contrast, AZN has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
JNJ has a B grade for Value, which is consistent with its 13.13x forward EV/EBITDA, which is 1.2% lower than the 13.30x industry average. However, AZN has a C grade for Value, which is in sync with its 14.63x forward EV/EBITDA, which is 10% higher than the 13.30x industry average.
Moreover, JNJ has a B grade for Quality. This is justified given JNJ’s 0.53% trailing-12-month asset turnover ratio, which is 53.3% higher than the 0.34% industry average. In comparison, AZN has a Quality grade of C, which is in sync with its 0.43% trailing-12-month asset turnover ratio. Despite being higher than the 0.34% industry average, it is lower than JNJ’s ratio.
Among the 174 stocks in the Medical – Pharmaceuticals industry, JNJ is ranked #3. In comparison, AZN is ranked #38.
Beyond what I have stated above, we have also rated the stocks for Growth, Momentum, Stability, and Sentiment. Click here to view all the JNJ ratings. Also, get all the AZN ratings here.
The Winner
The drug manufacturing industry is expected to grow tremendously with growing investments in research and development. While both JNJ and AZN are expected to gain, we think it is better to bet on JNJ now because of its lower valuation, higher profitability, and robust financials.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Medical – Pharmaceuticals industry here.
Click here to checkout our Healthcare Sector Report for 2022
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JNJ shares were trading at $175.80 per share on Thursday morning, up $1.28 (+0.73%). Year-to-date, JNJ has gained 3.42%, versus a -8.60% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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