Johnson & Johnson (JNJ) recently reported its third-quarter financials, with higher-than-expected revenue and earnings. It was the company’s first financial reporting since it spun off its consumer health business, Kenvue Inc. (KVUE).
In this piece, I have discussed why it could be wise to invest in JNJ following its third-quarter results.
For the quarter, JNJ’s EPS came in 5.5% above the consensus estimate, while its revenue beat analyst estimates by 1.4%. JNJ’s Chairman and CEO Joaquin Duato said, “Johnson & Johnson delivered strong results and significant pipeline advances in the third quarter, providing a solid foundation for future sustained growth.”
“With a sharpened focus on Innovative Medicine and MedTech solutions, Johnson & Johnson is innovating across the spectrum of healthcare and is poised to deliver the medical breakthroughs of tomorrow,” he added. JNJ recorded a gain of $21 billion in the third quarter due to the spin-off of its consumer health business.
The company’s Innovative Medicine segment sales grew 5.1% year-over-year to $13.89 billion. In addition, its MedTech segment’s sales rose 10% over the prior-year quarter to $7.46 billion. The company aims to achieve $57 billion in drug sales by 2025.
For fiscal 2023, JNJ expects operational sales growth to be between 8.5% and 9%, while its adjusted operational sales growth will likely come between 7.2% and 7.7%. Both these estimates are higher than the previous projections.
Its adjusted operational EPS is expected to come between $10.02 and $10.08, representing a growth between 12.2% and 12.8%. This is higher than the previous projection of $9.90 -$10. Similarly, its adjusted EPS for fiscal 2023 is expected to come between $10.07 and $10.13, representing a growth between 12.7% and 13.3%.
On October 17, 2023, JNJ announced that it embarked on a two-year restructuring program for its orthopedics business. This announcement comes after its third-quarter medical devices sales fell short of Street expectations. The company said it plans to exit specific markets and stop selling some orthopedic products as part of the restructuring program.
JNJ’s stock has performed poorly, declining 14.3% year-to-date and 10.3% over the past year to close the last trading session at $151.39.
Here’s what could influence JNJ’s performance in the upcoming months:
Robust Financials
JNJ’s sales to customers for the third quarter ended October 1, 2023, increased 6.8% year-over-year to $21.35 billion. After-tax, its adjusted net earnings from continuing operations rose 14.1% year-over-year to $6.78 billion. The company’s gross profit increased 6.7% over the prior-year quarter to $14.75 billion. In addition, its adjusted EPS came in at $2.66, representing an increase of 19.3% year-over-year.
Mixed Analyst Estimates
JNJ’s EPS and revenue for fiscal 2023 are expected to decline 0.6% and 10.8% year-over-year to $10.08 and $84.74 billion, respectively. On the other hand, its EPS and revenue for fiscal 2024 are expected to increase 7.4% and 3.6% year-over-year to $10.83 and $87.82 billion, respectively.
High Profitability
In terms of the trailing-12-month gross profit margin, JNJ’s 67.33% is 20.9% higher than the 55.67% industry average. Likewise, its 35.29% trailing-12-month EBITDA margin is 575% higher than the industry average of 5.23%. Furthermore, the stock’s 21.99% trailing-12-month levered FCF margin is significantly higher than the industry average of 0.55%.
Mixed Valuation
In terms of forward non-GAAP P/E, JNJ’s 15.01x is 16.5% lower than the 17.98x industry average. Its 11.68x forward EV/EBITDA is 3.3% lower than the 12.08x industry average. Likewise, its 13.55x forward EV/EBIT is 11.4% lower than the 15.29x industry average.
On the other hand, in terms of forward non-GAAP PEG, JNJ’s 5.61x is 203.1% higher than the 1.85x industry average. Likewise, its 4.52x forward EV/Sales is 42.9% higher than the 3.16x industry average. Its 4.3x forward Price/Sales is 27.1% higher than the 3.38x industry average.
POWR Ratings Show Promise
JNJ has an overall B rating, equating to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. JNJ has a B grade for Quality, consistent with its high profitability. It has a B grade for Stability, in sync with its 0.57 beta.
JNJ is ranked #11 out of 157 stocks in the Medical - Pharmaceuticals industry. Click here to access JNJ’s Growth, Value, Momentum, and Sentiment ratings.
Bottom Line
Despite its medical device unit missing Wall Street sales estimates in the third quarter, it recorded strong sales growth in its pharmaceutical business. Its popular Stelara drug will boost revenues until biosimilars reach the market.
Due to strong business momentum, JNJ has raised its sales and earnings estimates for fiscal 2023. Moreover, its decision to restructure its orthopedics businesses is expected to help drive growth and enhance profitability.
Given its robust financials, strong guidance for fiscal 2023, and high profitability, it could be wise to buy the stock now.
How Does Johnson & Johnson (JNJ) Stack Up Against Its Peers?
While JNJ has an overall grade of B, equating to a Buy rating, you may also check out these other A (Strong Buy)-rated stocks within the Medical - Pharmaceuticals industry: Novartis AG (NVS), AbbVie Inc. (ABBV), and Novo Nordisk A/S (NVO). For exploring more A and B-rated Medical – Pharmaceutical stocks, click here.
What To Do Next?
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JNJ shares were trading at $151.15 per share on Tuesday morning, down $0.24 (-0.16%). Year-to-date, JNJ has declined -12.54%, versus a 12.12% 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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