Johnson & Johnson has been treading water for the past six months, recording a small loss of 3.8% while holding steady at $157.30. However, the stock is beating the S&P 500’s 11% decline during that period.
Is there a buying opportunity in Johnson & Johnson, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even with the strong relative performance, we're cautious about Johnson & Johnson. Here are three reasons why you should be careful with JNJ and a stock we'd rather own.
Why Is Johnson & Johnson Not Exciting?
Founded in 1886 and known for its iconic red cross logo, Johnson & Johnson (NYSE: JNJ) is a global healthcare company that develops and sells pharmaceuticals, medical devices, and technologies focused on human health and well-being.
1. Declining Constant Currency Revenue, Demand Takes a Hit
Investors interested in Branded Pharmaceuticals companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of Johnson & Johnson’s control and are not indicative of underlying demand.
Over the last two years, Johnson & Johnson’s constant currency revenue averaged 1.4% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Johnson & Johnson might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Looking at the trend in its profitability, Johnson & Johnson’s adjusted operating margin decreased by 20.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 29.8%.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Johnson & Johnson, its EPS declined by 2.8% annually over the last five years while its revenue grew by 5.4%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Johnson & Johnson isn’t a terrible business, but it isn’t one of our picks. Following its recent outperformance in a weaker market environment, the stock trades at 15× forward price-to-earnings (or $157.30 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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