As it stands out over and over again, Johnson and Johnson (JNJ) constantly does not generate the good results reflected by the share price. The healthcare company had a horrible Q2, however, stocks hit a new all-time high during the quarter. My investment thesis is still very negative in stocks due to the disconnect between JNJ’s market valuation and actual results.
Image source: JNJ website
Horrible results
JNJ reported some horrible second-quarter results, although it’s probably not that bad considering the economic shutdown. The key is that the actual results relative to the stock price have a big disconnect.
The health company reported that sales fell 9%, while EPS fell 35%. The company was severely affected due to the postponement of medical procedures during fears of the COVID-19 pandemic. The recent increase in hospitalizations in large parts of the country during July could easily affect results again this quarter.
These are not the numbers worthy of JNJ reaching $ 157 in April. Sure, JNJ can’t control whether medical device sales drop 32.5% due to fewer elective procedures during the quarter, but stocks shouldn’t be trading at a record high and a valuation above $ 400 billion when a company fails you can control your end markets.
Source: JNJ Q2’20 earnings release
The market generally gets the benefit of the doubt, as the company always raises guidance after the numbers drop. JNJ expects to report a big drop in earnings this year, but the company raised guidance after a second-quarter profit of $ 0.16. At the end of the day, the healthcare company forecasts an EPS in 2020 of just $ 7.85 with analysts targeting $ 9.03 in 2021.
Note that JNJ earned $ 8.68 in 2019. Analysts forecast very limited EPS growth over the 2-year period. The pandemic should not impact 2021 results to any great extent, as consumers will need healthcare products and medical procedures as the economy recovers.
At $ 147, the stock is already trading at more than 16x 2021 EPS estimates. Analysts have very limited growth prospects for earnings once they normalize to the $ 10 a share range in 2022 and beyond.
Data by YCharts
Essentially, investors are paying up to 3-4 times the normalized growth rate for this stock of just 4% to 5%. An excellent example of this valuation disconnect remains in the low dividend yield. Yield declined to just 2.6% and approached decade-long lows as equity gains outstripped dividend increases.
Data by YCharts
No vaccine benefit
A big reason JNJ bounced back to new highs was the hype surrounding a vaccine for COVID-19. While the final developer of a viable coronavirus vaccine might see great benefit in the long run, JNJ is likely not the company here.
The health care company has just announced that the Phase 1 clinical trial will begin next week for the Ad26.COV2-S vaccine candidate. The trial version of Phase 3 will not be released until September at the earliest.
Vaccination lags far behind both vaccine candidates Modern (MRNA) and AstraZeneca (AZN), among others. Both vaccine candidates hope to begin Phase 3 trials in the coming weeks with results for September, after initial Phase 1 results showed antibodies in healthy volunteers.
JNJ is not only far behind the curve, but the company doesn’t even plan to benefit from the vaccine. According to President and CEO Alex Gorsky in the second quarter results release, the company made the following statement about plans not to produce the vaccine for profit:
We are bringing together our best minds, our global footprint, and our sophisticated supply chain technology to fulfill our commitment to provide the vaccine in a non profit for pandemic emergency use, worldwide. We know that the need is urgent, and we commit ourselves every day to do our part to find a solution for the global good.
With ongoing legal problems with talcum powder and other pending lawsuits estimated to exceed 50,000 cases, investors must even wonder if patients would line up for a JNJ vaccine without studies on long-term side effects. Investors must sell any rally based on the promise of a vaccine not obtained for profit and months after the top candidates.
To carry out
The key investor conclusion is that JNJ continues to fail on the upside. Its COVID-19 vaccine lags far behind the competition, and the healthcare company is a litigation nightmare. Investors should avoid stocks until there is a better value for the company’s low growth rates.
Divulge: I / we have no positions in any mentioned action, and we have no plans to initiate any positions within the next 72 hours. I wrote this article myself and express my own opinions. I receive no compensation for it (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a request to buy or sell securities. Before buying or selling any stock, you should do your own research and come to your own conclusion or consult a financial advisor. The investment includes risks, including loss of capital.
