Johnson & Johnson Earnings: Broad Portfolio Strength Drives Solid Results

Johnson & Johnson Stock at a Glance

• Fair Value Estimate: $164.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Low
• Morningstar Economic Moat Rating: Wide

Johnson & Johnson Earnings Update

Johnson & Johnson JNJ reported stronger second-quarter results than we projected and raised its 2023 guidance, but we don’t expect any major changes to the firm’s fair value estimate.

During the quarter, broad strength across the portfolio supported 6% operational growth (excluding acquisitions), but we expect this growth to slightly slow over the next three years. As medical procedures continue to rebound following the COVID-19 pandemic, demand for J&J’s devices has increased (sales up 10%), but we expect this bolus of demand to normalize by 2025. The drug group posted solid growth (up 4%), but we project slowing growth as generic pressures build, especially with the expected launch of the biosimilar Stelara in early 2025.

The consumer group Kenvue (up 8%) showcased its brand power by largely passing along inflationary supply costs. The remaining divestiture of Kenvue (J&J still owns close to 90%) could come as early as the next few days in the form of a split-off. This would allow current J&J shareholders the option to take Kenvue shares or J&J shares (excluding Kenvue). We continue to view the strong intangible assets in the pharma business and switching costs in the device segment (along with some intangible assets) as supporting a wide moat for J&J.

On the talc litigation risk, we believe the firm’s strategy to move this legal overhang into a bankruptcy subsidiary for $8.9 billion will likely progress in the third quarter. For this plan to work, 75% of claimants would need to support the arrangement. Even though a recent case favored a plaintiff, we expect J&J to appeal that case into a venue where more scientific information will be allowed, increasing the probability that the ruling will be overturned. If the plan lacks enough claimant support, we expect J&J to follow a more traditional path of litigating cases one by one until it reaches a settlement with costs comparable to the bankruptcy strategy.