Johnson & Johnson: Steady Quarter, Lower 2020 Guidance

Against a backdrop of coronavirus challenges, Johnson & Johnson JNJ reported first-quarter results largely in line with our expectations and provided updated full-year guidance slightly below our projections. We don’t expect material changes to our fair value estimate based on the quarterly results, and we view the stock as slightly overvalued, as investors appear willing to pay a premium for the firm’s defensive cash flows.

We continue to view the company as having a wide moat supported by quarterly sales gains in the drug segment (fueled by patent-protected innovation) and the consumer business (aided by strong brand power). While more apparent in the consumer group (up 11% operationally year over year), stockpiling also slightly helped the drug group (up 10%). We expect over-the-counter medicines and other consumer goods to start to normalize closer to mid-single-digit growth by the second half of the year. We continue to expect steady drug sales, given patients’ high need and less distribution impact due to the coronavirus, with the exception of likely delays in new patient starts and hospital-administered drugs.

On the weaker side, the coronavirus crowded out elective procedures, which represent over half of J&J’s related devices, causing the segment to fall 5%. We expect device sales to decline faster in the second quarter followed by a rebound in growth in early 2021. However, we expect the strong switching costs inherent in the products will allow the firm to maintain market share and support its moat.

We expect an improving medical community understanding of the coronavirus and likely development of treatments and vaccines will support the 2021 device rebound. We expect J&J to lead the charge in developing a coronavirus vaccine with annual production of 600 million-900 million vaccines likely by early 2021. However, we don’t expect the vaccine to affect the firm’s valuation, given the desire to offer the vaccine on a nonprofit basis.

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