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Is Johnson & Johnson a Buy?

By Zhiyuan Sun - Mar 10, 2021 at 6:20AM

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There are better reasons for investing in Johnson & Johnson than its coronavirus vaccine.

It may be surprising to hear that coronavirus vaccine maker Johnson & Johnson (JNJ 0.91%) has significantly underperformed the market over the past year. Indeed, during that period, the pharma giant's stock only went up a meager 12%, far less than the S&P 500 index's mouth-watering 30% gain. This has left many investors wondering: Why?

As it turns out, the golden age of investing in coronavirus vaccine stocks is mostly over. Now's the time for coronavirus vaccine manufacturers to show that they can turn reliable profits with what they developed. Can Johnson & Johnson accomplish that goal?

Man holding coronavirus vaccine record and flashing a thumbs-up

Image source: Getty Images.

Get excited about the stock, not the vaccine

Investors new to Johnson & Johnson are arguably most enthusiastic about its coronavirus vaccine. During clinical testing, 85% of patients who received the vaccine became protected against severe cases of COVID-19. There were little to no serious side effects. The vaccine received Emergency Use Authorization (EUA) in the U.S. late last month.

The vaccine is appealing given that it requires only a single dose for adequate immunization. Johnson & Johnson has already received orders for 500 million doses, with the capacity to produce one billion doses this year. At a price tag of $10 per dose, that means the company could have up to $10 billion in potential revenue over the next two years.

However, it is important to note that Johnson & Johnson does not expect to profit from this venture. That means while its vaccine will have a material impact on its revenue, it will not change its bottom line this year. Because the promise is gratuitous (like giving a gift without asking anything in return), however, Johnson & Johnson is under no obligation to supply its vaccine at break-even levels and could very well charge a profit in the future.

That said, Johnson & Johnson is a great stock to buy purely for its core business strength. Last year, the company's consumer health, medical devices, and pharmaceutical segments brought a combined $82.6 billion in revenue, up 0.6% over 2019. The COVID-19 pandemic led to the deferral of many elective procedures and discretionary medical apparatus spending. As a result, the pharma giant's earnings per share (EPS) declined by 7.5% year over year to $8.03.

This year, however, Johnson & Johnson expects to rebound sharply. It is forecasting annual revenue and EPS of $91.7 billion and $9.50, respectively. The company has five phase 3 clinical data readouts on the way for therapeutics that target Crohn's disease, schizophrenia, leukemia, COVID-19, and prostate cancer. It also has nine potential drug approvals in the same period. There are approximately 50 therapeutic candidates in Johnson & Johnson's pipeline ranging from neuroscience to oncology.

One key thing driving Johnson & Johnson's growth is its commitment to research and development. In 2020, it spent over $12 billion in that area. Alongside the commitment, the company still paid $10.5 billion in dividends to shareholders. Its stock currently has an annual dividend yield of 2.6%.

What's the verdict?

Right now, the average pharma stock trades for 4.9 times revenue and 34 times earnings. Johnson & Johnson stock is a little cheaper at five times sales and 21 times free cash flow. Given its robust guidance, outstanding pipeline, and solid dividend yield, this is definitely a top pharma stock to add to your portfolio.

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