Update shared on29 Oct 2024
Fair value Decreased 1.81%Innovation And MedTech Set To Outperform Historical Growth Rates
- JNJ reported $22.5B in quarterly sales, up by 5.2%. This is slightly below my 6% annual growth estimate, but well within the margin of error.
- For FY’24, the company expects operational sales around $89.6B, implying a 5.3% annual growth. While the future target is still below my estimated 6%, I think that JNJ still have a path to achieving $120B in sales in 2029.
- The company’s main segments: Innovative Medicine, and MedTech, posted quarterly growth of 4.9% and 5.8% respectively.
- Quarterly earnings came in at $2.694B, down by 37.5%. This is primarily due to a one-time special charge and acquiring IPR&D. Despite this, the adjusted earnings were still down by 13.3% to $5.876B. The 12% profit margin is still far from my 20% target margin. I expect JNJ to re-accelerate profitability after settling its pending court cases and start converging profits towards 20% after 2025.
Revenue growth is supported by Innovative medicine as sales exceeded $14B, with 11 key brands growing double digits. Darzalex reached $3B in sales in a single quarter. The company received five major U.S. and EU approvals for innovative medicines in Q3, including Rybrevant plus Lazcluze and Tremfya.
In MedTech, the company saw double-digit growth, particularly in cardiovascular markets, due to recent acquisitions like Shockwave and Abiomed. Management is estimating a weighted average growth from 2022 to 2027 from 5% to 7% in this segment.
I expect these combined tailwinds from Innovative Medicine drug introductions and MedTech market growth to help mitigate the biosimilar availability of Stelara from the EU, which is also expected to hit the U.S. in January 2025.
Valuation Implications
For the reasons mentioned above, I am maintaining my 6% annual revenue growth estimate and extending it to 2029, resulting in around $120B of sales in 2029. I believe that extrapolating the past 1.45% CAGR growth of the past 10 years is a misconception as JNJ will be focused on a higher return business ever-since the Kenvue spinoff.
In the future, JNJ expects a reduction of IPR&D expenses, operating expenses optimization, and an increased margin from MedTech. I think the company will be able to maintain and possibly keep improving the bottom line, now that the business is focused on the more profitable Innovative Medicine and MedTech segments.
This is why I am maintaining my profit margin of 20% in 2028, and expect it to continue in 2029.
Extending my 22x PE estimate to 2029, with a net income estimate of $24B, I get a future value of $528B, around $230 per share for JNJ.
Discounting back to today using Simply Wall St’s 5.8% rate, I get a new present value of $174 per share, which is $5 higher than my prior valuation estimate.
Disclaimer
Simply Wall St analyst Goran_Damchevski holds no position in NYSE:JNJ. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimate's are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.