This pharmaceutical company is a better choice than Johnson & Johnson stock

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We think AbbVie Shares (NYSE: ABBV) is currently a better choice than its peer, Johnson & Johnson stock (NYSE: JNJ), given its better growth prospects. Both companies are comparable to AbbVie in terms of valuation
ABBV
trading at 4.7x trailing earnings, and J&J trading at 4.6x. A similar valuation for both companies doesn’t make sense in our view, as AbbVie has shown better revenue growth and is more profitable, as we discuss in the sections below.

Looking at stock returns, AbbVie, with a 16% return this year, has outperformed the 3% return for J&J stock and -17% return for the broader S&P 500 index. There’s more to the equation, and in the sections below we discuss why we think ABBV is a better choice than JNJ. We compare a whole range of factors, such as historical revenue growth, returns and valuation multiple, in an interactive dashboard analysis from Johnson & Johnson v AbbVie: Which stock is a better bet? Parts of the analysis are summarized below.

1. AbbVie’s revenue growth is better

  • AbbVie’s 6.7% revenue growth over the last twelve months is higher than J&J’s 4.9%.
  • Even looking over a longer period of time, AbbVie’s revenue growth has been better. It increased at an average annual growth rate of 20.6% to $56.2 billion in 2021, compared to $32.8 billion in 2018, while J&J’s saw its sales increase at an average annual rate of just 4.9% to $ 93.8 billion in 2021, compared to $81.6 billion in 2018.
  • While J&J’s medical device business faced headwinds in 2020 due to the impact of the pandemic, they recovered in 2021.
  • The pharmaceutical segment saw sales increase by 14% in 2021 and sales of the medical devices segment increased by 18%. The strong performance of both segments is expected to continue going forward.
  • The company’s pharmaceutical business is experiencing strong growth, led by market share gains for its cancer medicines, Imbruvica and Darzalex, and immunology medicines, Stelara and Tremfya.
  • J&J is currently in the process of spinning off its consumer healthcare business.
  • AbbVie’s sales growth was supported by its Allergan
    AGN
    acquisition in 2020.
  • AbbVie is best known for its blockbuster drug – Humira – which is used to treat rheumatoid arthritis and Crohn’s disease, among other things. Humira posted a whopping $20.7 billion in sales in 2021, reflecting 4% yoy growth. Now, Humira’s biosimilar has already appeared in European markets, weighing on the company’s international sales. The biosimilars are expected to enter the US next year, likely leading to a significant drop in Humira sales in the years to come.
  • That said, Humira is prepared to combat this biosimilar impact with its 2020 acquisition of Allergan, giving it access to the multi-billion dollar product Botox. In addition, the relatively new drugs Skyrizi and Rinvoq, used to treat plaque psoriasis and rheumatoid arthritis, are gaining market share. By comparison, these three products brought in $9.3 billion in 2021, reflecting 94% yoy growth. Even looking at the first nine months of 2022, Skyrizi’s revenue is up a whopping 76% to $3.6 billion, and Rinvoq’s revenue is up 54% to $1.8 billion.
  • U.S Johnson & Johnson earnings and AbbVie Earnings dashboards provide more insight into the turnover of the companies.
  • Looking ahead, AbbVie’s revenue is expected to grow faster than J&J’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 8.6% for AbbVie, compared to a CAGR of 3.3% for J&J, based on Trefis Machine Learning analysis.
  • Please note that we have different methodologies for companies negatively impacted by Covid and those not or positively impacted by Covid when forecasting future earnings. For businesses negatively impacted by Covid, we factor in the quarterly revenue recovery trajectory to predict recovery to pre-Covid revenue percentage. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies that show positive sales growth during Covid, we consider annual average growth pre-Covid with a certain weighting for growth during Covid and the last 12 months.

2. AbbVie’s operating margin is better

  • AbbVie’s operating margin of 30.3% over the last twelve months is better than J&J’s 23.7%.
  • This compares to 39.0% and 24.1% respectively in 2019, before the pandemic.
  • AbbVie’s free cash flow margin of 40.0% is also better than J&J’s 22.5%.
  • U.S Operating income Johnson & Johnson and AbbVie operating income dashboards have more details.
  • Looking at financial risk, J&J is better placed between the two. The debt of 14.9% as a percentage of equity is lower than 26.1% for AbbVie, while the 19.5% cash as a percentage of assets is higher than 7.0% for the latter, implying that J&J is a better debt position and more cash buffer.

3. The network of everything

  • We see that AbbVie has shown better revenue growth and is more profitable. On the other hand, J&J offers relatively lower financial risk with its better debt and cash position.
  • Looking at the outlook now on a P/S basis, we think AbbVie is likely to deliver better returns than J&J over the next three years due to the large swings in P/E and P/EBIT.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and indicates an expected return of 21% for AbbVie over this period and a 3% expected returns for J&J, implying investors are likely better off choosing ABBV over JNJ, based on Trefis Machine Learning analysis – Johnson & Johnson v AbbVie — which also gives more details on how we arrive at these numbers.

While ABBV may outperform JNJ over the next three years, it’s useful to see how Peers from Johnson & Johnson rate on metrics that matter. Other valuable comparisons for companies in different industries can be found at Peer comparisons.

In addition, the Covid-19 crisis has led to many price discontinuities which can provide attractive trading opportunities. For example, you’d be surprised how counterintuitive stock valuation is Amedisys v Amerco.

Despite higher inflation and rate hikes by the Fed, JNJ has seen a 3% increase this year. But can it fall from here? See how low Johnson & Johnson stock can go by comparing its fall to previous market crashes. Here’s a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? U.S high-quality portfolio and multi-strategy portfolio have consistently beaten the market since the end of 2016.

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