Johnson & Johnson (NYSE: JNJ) posted mixed results for its Q4 FY2022 earnings. Revenue for the company came in below analysts’ expectations although adjusted earnings did beat expectations.
Johnson & Johnson, or better known as J&J, is one of the Big Pharmaceutical (Big Pharma) firms in the US and operates in three business segments: consumer health, pharmaceuticals and medical devices.
During Q4 FY2022, total sales came in at US$23.7 billion, representing a decline of 4.4% from a year ago, as lower COVID-19 vaccines sales and a strong US dollar hit the pharma company’s revenue.
Adjusted earnings per share (EPS) climbed 10.3% year-on-year (yoy) to S$2.35, coming in at S$0.11 above consensus.
Despite the mixed results, I believe the recent pullback in J&J’s share price represents a buying opportunity for long-term investors. Here are five reasons why.
1. Bullish outlook for 2023
Source: J&J’s Q4 FY2022 Earnings Call
J&J offered a positive outlook for 2023, guiding for full-year reported sales to grow by 4.5% to 5.5% to between US$96.9 billion and US$97.9 billion.
This guidance is based on a constant currency basis and is driven by the favourable impact from its Abiomed acquisition.
Going forward, management expects no impact from foreign currency (forex) translation on its reported sales.
Adjusted EPS is also expected to grow at a midpoint of S$10.55, or 4.0%, which is an upward surprise as compared to analysts’ average consensus expectations of $10.33.
During the earnings call, management said that it expects its pharmaceutical arm to continue to deliver above-market growth, driven by key assets as well as continued uptake of new drug launches.
The growth is expected despite the loss of exclusivity (LOE) with STELARA in the US.
As for the company’s MedTech business, management expects competitive growth to be fuelled by a market recovery and continued uptake of recently-launched products.
In Consumer Health, growth is expected to be in line with the market’s growth.
2. Impact of COVID vaccine likely to dissipate in 2023
Looking into J&J’s earnings in its latest quarter, the decline in COVID-19 vaccine sales was the main drag on its top-line growth.
In fact, excluding COVID-19 vaccines, J&J would have reported a decline of just 2.5% in its pharmaceutical revenue as compared to the actual 7.4% decline.
JNJ management also noted more positive trends in other key drug brands, including ongoing market share gains.
Source: J&J’s Q4 FY2022 Earnings Call
3. J&J Sticking to aggressive pharma sales target for 2025
Despite the challenging macro environment, J&J remains confident that its drug business will pull in US$60 billion of sales by 2025 as its Chairman and CEO, Joaquin Duato, reiterated its ambition on a call with investors.
According to its CEO, the growth in the pharmaceutical business will be fuelled “mainly through the strength of our currently marketed portfolio,” as well as the potential of its commercial drugs.
Management expects 2023 to be another year of above-market growth, followed by positive growth in 2024 and a significant pickup in growth in 2025.
4. J&J continues to reward shareholders
Source: J&J’s Q4 FY2022 Earnings Call
Another reason to put J&J on your watchlist is the company’s capital allocation strategy that prioritises its shareholders.
The top priority of management continues to be on research & development (R&D) with more than 15% of sales, or a total of around US$15 billion, being invested in R&D.
This will play a vital role in maintaining J&J’s leading position in the pharmaceuticals industry.
Among some of the investments are strengthening its MedTech pipeline and progression of its multiple myeloma portfolio.
The second priority is J&J’s commitment to dividends. Last year marked the 60th consecutive year of an increased annual dividend for J&J.
At its current price, J&J is trading at a 12-month forward dividend yield of 2.7%.
5. Significant progress in the spinoff of its Consumer Health business
During the earnings call with analysts, management shared that significant progress was being made towards the separation of Kenvue, its new Consumer Health company.
J&J has already started to operate its consumer business as a company within the Group and has also filed its Form S-1 with the Securities and Exchange Commission (SEC) that allows J&J the option to pursue an IPO as a potential next step.
The company’s management guided that J&J is on track to complete the separation in 2023, similar to the guidance provided during its initial announcement in 2021.
Attractive valuation for a resilient healthcare company
Investors should consider buying J&J stock given its current attractive valuation.
On a 12-month trailing price-to-earnings (PE) ratio, J&J is trading at 23.4 times as compared to its five-year average of 69.8 times. It is also trading at a discount to its peers’ average of 25.5 times.
Similarly, when we look at a 12-month forward PE ratio, J&J is trading at 21.2 times, which is a discount to the sector average of 26.4 times.
Aside from that, the Wall Street Journal also highlights that the average analysts’ target price for J&J stood at US$184.72.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
