Johnson & Johnson (JNJ, Financial) has been in the news for a number of reasons lately.
The company's shareholders had a small scare when the Food and Drug Administration hit the pause button on its Covid-19 vaccine due to concerns about rare blood clotting issues. This was eventually lifted even though there continue to be concerns related to its vaccine, with a recent Washington Post survey claiming that more than 75% of unvaccinated Americans would be hesitant to choose the company's vaccine.
Despite all these concerns, management did not disappoint shareholders and delivered strong quarterly results with increased revenue from the medical devices as well as its pharmaceutical segment. The Covid-19 vaccine also made a decent contribution to the top line. After strong guidance from the management, the company's stock is currently trading at a forward price-earnings multiple of 17.51, making it an interesting pick for a more detailed analysis.
Recent financial performance
Johnson & Johnson has had a reasonably strong year, reporting five back-to-back all-around beats. For its first-quarter results, the company reported a top line of $22.32 billion, which was a 7.88% increase as compared to the $20.69 billion in revenue reported in the corresponding quarter of 2020. Johnson & Johnson cruised past the analyst consensus estimate of $21.98 billion.
Revenue translated into a gross margin of 68.36% and an operating margin of 29.78%, which was higher than that in the same quarter of the previous year.
The company reported a net income of $6.20 billion and adjusted earnings per share of $2.59, which was higher than the average Wall Street expectation of $2.34. The top line growth, as well as the impressive bottom line, was a function of a solid performance across multiple products.
Strong product performance
Johnson & Johnson's two core pharma products, namely Darzalex and Imbruvica, were among the biggest drivers of its top-line growth in the recent quarter. Darzalex revenue grew 45.6% to $1.37 billion as a result of higher penetration. On the other hand, Imbruvica, a drug that Johnson & Johnson makes in partnership with AbbVie (ABBV, Financial), showed 9% growth in sales to $1.13 billion.
Among the other top-performing products of the company were Stelara with revenue of $2.15 billion and Tremfya with $418 million in sales. Pulmonary arterial hypertension revenue of $861 million rose 15.5%, driven by strong sales growth for Uptravi and Opsumit. All these brands fall within the largest segment of the company, which is pharmaceuticals. Additionally, management introduced new products, including an update to the company's Carto 3 System and the Carto Prime mapping module, which further enhanced the market position of Johnson & Johnson globally. It is also worth mentioning the company received U.S. approval and a positive opinion from the Committee of Medicinal Products for Human Use in the European Union for Ponvory in multiple sclerosis.
The Covid-19 vaccine upside
In February, the FDA issued Emergency Use Authorization for Johnson & Johnson's Covid-19 vaccine, which was developed by the Janssen Pharmaceuticals division. After being administered for a while, U.S. regulators put a temporary pause on this vaccine due to blood clotting issues. However, this pause has been lifted and the company will be resuming its vaccine rollout in Europe.
Johnson & Johnson's vaccine is the only single-dose Covid-19 vaccine available in the market today that has demonstrated its efficacy against multiple variants. Moreover, the vaccine can easily be stored in regular refrigerators as opposed to most of its competitors, which require ultra-low temperatures for storage. These factors create a particularly large market for the company outside the U.S., especially in countries like India that are witnessing heavy casualties, have a very low vaccine penetration and a weak storage infrastructure. The company has been in talks with Indian regulators to commence bridging trials and could witness a huge upside once its vaccines enter the Indian market.
Valuation and final thoughts
As illustrated in the chart above, the share price has been volatile for the past 12 months, largely due to the negative impact of the pandemic on its overall business as well as the uncertainty related to its vaccine performance. Moreover, the price slipped after a halt on the distribution of the company's Covid-19 vaccine due to health risk-related factors. However, it has been recovering on the back of positive first-quarter results and also because of the resumption of vaccine distribution in Europe.
The company is trading at a price-earnings ratio of 29.24 and an enterprise value-to-revenue ratio of 5.27, which are both well above the median for the health care industry but well below the historical highs for Johnson & Johnson. The GF Value chart indicates the stock is modestly overvalued and there is definite scope for revenue growth as well as multiple expansion. Overall, I believe that despite all the vaccine-related volatility and other business risks, Johnson & Johnson is an excellent blue-chip company with a vast addressable market that deserves to be held tight over the long term.
Disclosure: No positions.
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