Is JNJ Stock Overvalued?

Johnson and Johnson (NYSE:JNJ) was founded in 1886 and develops a range of medical devices, consumer packaged goods, and pharmaceuticals. The company’s brands include Listerine, Aveeno, OGX, Neutrogena, Tylenol, Benadryl, Nicorette, Band-Aid, and more. It’s a component of the Dow Jones Industrial Average (DJIA) and S&P 500 (SPY).

As panic shopping hit around the world, its products were essentials that many stocked up on, driving revenues and stock prices upward and easily allowed it to recover from the coronavirus pandemic. But is JNJ stock overvalued?

It’s older than the stock market itself, and the company is experiencing an all-time high market cap. It also committed $1 billion toward development of a COVID-19 vaccine in the form of a free grant from Operation Warp Speed to help its subsidiary Janssen with the development.

Still, the company’s commitment to household staple brands, along with its deep involvement in resolving the coronavirus crisis, could help propel its profits even higher and create a major windfall for investors.

However, it’s already a large company heading for a $400 billion market cap, and growth is limited at this scale. We explore the JNJ’s financials, roadmap, and coronavirus response to learn how it plans to justify its value.

Why JNJ Stock Went Up

Johnson & Johnson is up compared to the S&P 500, with its research and development of Covid-19 vaccine candidate Ad26.COV2-S leading the way. It proved efficacy in pre-clinical studies and moved on to Phase 3 clinical trials by September 23, 2020.

This put it on a fast track to regulatory approval, and the government is holding a purchase order for 100 million doses of the completed vaccine once approved.

This will be a huge revenue driver if it can gain approval, but it still lags behind frontrunner AstraZeneca plc (NASDAQ:AZN), which entered the same phase a month earlier.

However, both AstraZeneca and Gilead Sciences, Inc. (NASDAQ:GILD) took a pummeling in clinical trials that led to cooling interest among investors.

While both of those competitors are heavily invested in the vaccine race, Johnson and Johnson’s pharmaceutical segment makes up just under half of its total revenue.

Once it gains approval from the Food and Drug Administration, it has the manufacturing capabilities to produce 1 billion doses of its vaccine by the end of 2021, 100 million of which are already sold to the U.S. government.

There’s a good chance it’ll end up with some sort of manufacturing deal with a smaller competitor should they not be able to fulfill orders.

Here’s an overview of the company’s financials to understand what resources it has available.

Johnson and Johnson Financials

Although its stock prices are experiencing a high, Johnson and Johnson’s Q2 earnings report showed the coronavirus still caused a slump in earnings.

Reported sales of $18.336 billion were a 10.8 percent drop from the same quarter of 2019. Net earnings of $3.626 billion fell even further, coming in at 35.3 percent below the Q2 2019.

This gave it adjusted diluted earnings per share of $1.67 versus $2.58 in the prior year’s second quarter. International sales dropped faster than U.S. sales, at -13.4 percent versus 8.3 percent, respectively.

Much of this decline was because of the 33.9 percent drop in medical device sales. This occurred because people stopped going to see the doctor as often, especially for elective procedures. While overall interest in staying healthy grew, the medical industry slumped, which hit the company the hardest.

Pharmaceutical sales were the one bright spot on the company’s books, showing a 2.1 percent increase from the prior year, driven by its existing portfolio brands, including Stelara, Darzalex, and Imbruvica.

It still has over $17 billion in cash on hand, but with sales declining in key areas, some analysts wonder if JNJ stock prices may have peaked. This is what you need to know.

Is JNJ Valuation Too High?

The coronavirus isn’t the only illness this conglomerate is focused on – it has successful treatments for autoimmune disorders, plaque psoriasis, multiple myeloma, and more. Its cancer drugs saw big increases of 33 percent and 21.5 percent, respectively, for Darxalex and Imbruvica.

While medical device sales were low, the segment still brought in $4.3 billion for the quarter. But consumer sales for brands like Tylenol and Motrin slumped as consumers became less worried about headaches and more focused on possible side effects related to Covid-19.

Stock prices are trading close to the 52-week high of $157 per share, giving the company a healthy $380 billion market cap and climbing. This represents a nearly 5x multiple over its $82.1 billion 2019 sales, and these sales are slumping in 2020.

However, if its coronavirus vaccine picks up and it can readjust its supply chain to meet changing demands, the company could still grow by double or more over the next two years. This is especially true if its coronavirus vaccine candidate gets the green light from the FDA.

But could it still drop?

Will JNJ Stock Drop?

Until final results are tallied, we won’t know for sure whether JNJ’s Covid-19 vaccine will get approval. If it does, it represents a major revenue generator for the company that can easily make up for lighter sales from its other brands.

Of course, that vaccine isn’t the only place it’s facing competition – it faces strong heat in each market segment as trials conclude for newer cancer treatments and more. It also pays an annual dividend of $4.04 that was increased amid the pandemic.

While Johnson and Johnson may shrink a little in the short term, it has long-term prospects that make it a solid investment for those seeking a shelter from an impending recession.

Is JNJ Stock Overvalued? The Bottom Line

Johnson and Johnson is over 130 years old, and it’s one of the foundations of the American economy. Its iconic consumer brands are household names, and it’s at the forefront of the race to cure Covid-19 with a vaccine in Phase 3 clinical trials heading into the election.

However, it’s experiencing historic high market values while also facing shrinking revenues, especially in its medical device and overseas markets. But it has the resources to pivot however it needs to meet market demands.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.