Johnson & Johnson’s Stock Tops Out, But There’s More To The Story

After the devastation that Covid-19 wreaked upon the nation’s economy, there are glimpses of light that suggest there will be a revival after the illness. One of the first companies to almost fully recover from the coronavirus is Johnson & Johnson, which recently released strong quarterly results. Investors expressed their relief, sending JNJ stock soaring past pre-pandemic levels setting a new record high at $155.51.

According to its quarterly report, the company is on track for delivering a Covid-19 vaccine early next year – a non-profit venture in cooperation with the US Biomedical Advanced Research and Development Authority. The company also announced it would be increasing its dividend pay-out for the fifty-eighth year in a row.

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It’s a large and diversified healthcare company that currently operates through three divisions: pharmaceutical, medical devices and diagnostics, and consumer products. Based in New Brunswick, New Jersey, Johnson & Johnson suffered the same slowdown that so many other businesses faced with the spread of Covid-19 and the ensuing containment measures.

With most elective procedures being canceled, its medical device line took a hit, but Wall Street anticipates business will recover by early next year. Meanwhile, consumers started flocking to local pharmacies to stock up on consumer and pharmaceutical items, which created new demand for these products. Growth in these segments have helped offset the decline in others.

The firm’s reported top-line came in at $20.69 billion in revenue, which surpassed analyst expectations of $19.83 billion. With adjustments for acquisitions and divestments, JNJ “like-for-like” operations surged up 5.6 percent. While the stock’s all-time high is a positive sign for the future to come, some analysts are urging investors that it may be too soon to celebrate.

UBS Securities analyst Kevin Caliendo believes the stock price is too optimistic for the circumstances. Consequently, the firm downgraded the stock from 'Buy' to 'Neutral.' Experts state that Q1 would only reflect the initial impact of the coronavirus. JNJ’s leadership materially downgraded the firm’s annual guidance for 2020 earnings from a range of $8.95 to $9.10 to $7.50 to $7.90.

Additionally, many analysts expect the company's second-quarter will be its darkest Covid-19 chapter before things begin to look up in the third quarter and recovery ensues in the fourth quarter. Like JNJ’s leadership, Caliendo agrees that business will be better in the new year as people begin to reschedule elective surgeries and go back to filling their prescriptions.

But for the moment, there appears to be a disconnect between the actual numbers and the company’s stock price. The business will continue to trend upwards, but perhaps not as quickly as many would like to believe. "The stock is trading near historical high relative multiple on 2021," said Caliendo. “We believe upside from here depends more on a view of market valuation than [J&J]’s fundamentals.”