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Johnson & Johnson Or Pfizer For Better Returns?

Johnson & Johnson’s stock (NYSE: JNJ) has gained 27% since the March 23 lows, while Pfizer’s stock (NYSE: PFE) is up 16%, both underperforming the broader S&P, which is up 39%. The lockdown in various parts of the world has had a negative impact on the pharmaceuticals industry worldwide, due to the postponement of elective surgeries and hospital visits for non-emergency cases, resulting in lower prescriptions issued. This will likely have an impact on the business of both the companies. That said, we believe Johnson & Johnson will likely fare better than Pfizer because of its fundamentals, current valuation, and a strong late-stage pipeline, while Pfizer bets on biosimilars for some of the blockbuster drugs to drive its future growth, along with expansion of its breast cancer drug – Ibrance.

Our conclusion is based on our detailed dashboard analysis, ‘Is Johnson & Johnson Expensive Or Cheap vs. Pfizer?‘, wherein we compare trends in key metrics for the two pharmaceutical titans over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Johnson & Johnson Will Likely Outperform Pfizer Over The Coming Months

Johnson & Johnson’s P/E based on 2019 earnings has declined from 17x in 2019 to 16x currently, while Pfizer’s multiple has declined from 13x to 11x. Johnson & Johnson has historically enjoyed a premium over Pfizer’s multiple, given its diverse portfolio of pharmaceuticals, consumer healthcare, and medical devices businesses. Pfizer de-consolidated its consumer healthcare business last year.

Given the spread of coronavirus, there aren’t many people visiting doctors for non-emergency and non-Covid cases, which has resulted in lower prescriptions being issued. Johnson & Johnson’s medical devices business also gets impacted due to postponement of elective surgeries. This explains the underperformance of the stock vis-a-vis broader markets over the recent months, and the slight decline in its multiple.

That said, Johnson & Johnson is well positioned to see steady revenue and earnings growth in the coming years. It has a strong late-stage pipeline with over 35 programs. Its top selling drugs, Imbruvica, Darzalex, and Stelara, have seen strong growth over the recent years, and this trend is expected to continue led by market share gains, while its new drug, Tremfya, has already become a blockbuster with sales of over $1 billion in 2019, and $296 million (up 36% y-o-y) in Q1 2020.

The company is also developing a vaccine for Covid-19, and it is expected to start phase 1/2a trials over the second half of July. This is ahead of the company’s initial timeline of September. The company could have a leg up over rivals in terms of production capacity and distribution reach and has indicated that it aims to supply over one billion doses globally through the course of 2021, if the vaccine proves safe and effective. This could further bolster its sales growth. As lockdowns are lifted and investors could begin to focus on the company’s performance in 2021 and outward, it could potentially drive Johnson & Johnson stock upwards over the coming months.

Pfizer’s multiple of 11x appears lower compared to the levels seen over the past few years, and lower compared to Johnson & Johnson. However, the company’s revenues and margins are also at risk, due to lower prescriptions, as well as its exposure to vaccines, which will likely see bigger impact in the current crisis, given it largely falls under non-emergency cases.

But How Long Will the Market Remain Under Pressure?

  • The expected timeline for recovery in global economic conditions, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
  • Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of JNJ’s multinational peers. The complete set of coronavirus impact and timing analyses is available here.
  • We believe there will be a recovery in demand for most sectors by late June or early July, with gradual lifting of lockdowns and a gradual rise in number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers.
  • Although most companies will report poor Q2 results starting mid-July, market expectations will be boosted by a visible improvement in the situation on the ground.
  • While Johnson & Johnson looks like a better investment option compared to Pfizer in the long run, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Overall, Johnson & Johnson stock has given better returns over the recent months, though returns were in-line with Pfizer over recent years. Going by fundamentals, Johnson & Johnson looks to be a more attractive bet, given it has posted higher revenue and EPS growth over the last 5 years. Though Johnson & Johnson’s P/E ratio is higher than Pfizer’s, it is lower than the levels seen over the recent years. Moreover, Johnson & Johnson generates 2x the cash from operations compared to Pfizer, and its interest expense was 0.2x that of Pfizer in 2019. Looking at the above factors, we believe Johnson & Johnson to be currently a better bet compared to Pfizer.

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