Johnson & Johnson recently announced its plans to acquire Shockwave Medical for $13 billion, aiming to expand its cardiovascular intervention market offerings. This deal is expected to boost sales growth for J&J’s MedTech segment, which has seen a 10% increase in sales annually over the past three years. Shockwave generated revenue of $730 million in 2023, and it is projected to reach sales of around $900 million in 2024. While Shockwave’s stock has risen 26% in a month, J&J’s stock has seen a 6% decline. J&J’s offer represents a 17% premium to Shockwave’s price on March 25, a day before news of the potential acquisition broke.
In the longer term, J&J’s stock has shown minimal change, fluctuating slightly from early 2021 levels of $155 to around $150 currently, in comparison to a 40% increase in the S&P 500 over the same period. The performance of J&J’s stock relative to the index has been volatile, with returns of 9% in 2021, 3% in 2022, and -11% in 2023. In comparison, the S&P 500 had returns of 27% in 2021, -19% in 2022, and 24% in 2023, indicating that J&J underperformed the index in 2021 and 2023.
Even other heavyweights in the Health Care sector and megacap stars have struggled to consistently beat the S&P 500 in recent years. However, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the index each year over the same period. This portfolio offers better returns with less risk compared to the benchmark index, providing a more stable investment option.
With the current uncertain macroeconomic environment marked by high oil prices and elevated interest rates, the question arises as to whether J&J may face a similar situation as in 2021 and 2023 and underperform the S&P over the next 12 months, or experience a significant jump. From a valuation perspective, J&J’s stock appears to have room for growth, with a projected valuation of $180 per share, representing over 15% upside from its current levels. The forecast is based on a 17x P/E multiple and expected earnings of $10.70 per share for 2024.
In 2023, Johnson & Johnson reported revenue of $85.2 billion, reflecting a 6% increase year-over-year. The company saw a 4% rise in its pharmaceuticals business and an 11% growth in its medical devices segment. Key growth drivers included the multiple myeloma treatment Darzalex and the autoimmune drug Stelara, with sales of $9.7 billion and $10.9 billion respectively. However, Stelara faced market exclusivity challenges in the U.S. and is expected to face biosimilar competition in early 2025.
The MedTech segment’s strong growth can be attributed in part to recent acquisitions such as Abiomed and Laminar Inc., as well as the upcoming Shockwave acquisition. J&J’s overall sales are projected to increase at a 3% CAGR to $92.8 billion in the next three years, with the MedTech segment experiencing faster growth than the pharmaceuticals division. Despite trading at 14x forward earnings, below the 17x average over the last five years, J&J’s stock is expected to see further growth.
