Johnson & Johnson (NYSE: JNJ) is currently seen as a better pick over its peer Merck (NYSE: MRK) by analysts. Despite Merck trading at a higher valuation of 5.5x trailing revenues compared to J&J’s 4.2x, it is believed that J&J’s superior profitability and better prospects will lead to a narrowing of this valuation gap in the coming years. Factors such as historical revenue growth, returns, and valuation are compared to support this prediction. JNJ has shown little change in stock price over the last three years, while MRK has seen a strong 65% gain. However, JNJ may have better prospects in the future despite this recent performance.
Merck has experienced a 23% revenue growth between 2021 and 2023, compared to J&J’s 8% increase. J&J’s revenue growth has been led by key products such as Darzalex and Stelara in the pharmaceuticals business, while the medical devices business has also seen growth. On the other hand, J&J has faced challenges with some older drugs facing generic competition and declining sales. Merck’s revenue growth has been driven by the success of Keytruda, which has seen significant sales increases over the past few years. However, the loss of market exclusivity for Keytruda in the future may pose challenges for Merck.
In terms of profitability, J&J has a higher operating margin compared to Merck and a better financial position with lower debt and more cash cushion. Despite this, J&J trades at a lower valuation multiple than Merck, indicating that it may be undervalued compared to its peer. Looking at prospects and historical valuation averages, JNJ is seen as a better choice due to its lower valuation and potential for growth. It is believed that J&J’s medical devices business will continue to drive demand and contribute to its performance in the future.
Overall, analysts predict that J&J is better positioned for future success compared to Merck. While Merck may continue to see better revenue growth in the short term due to market share gains for Keytruda, its stock may face a downward adjustment in its valuation multiples in anticipation of Keytruda’s loss of market exclusivity in 2028. Despite recent stock price performance, it is believed that J&J will likely outperform Merck in the next three years. Investors are advised to consider these factors when making investment decisions and to look at peer comparisons for a broader perspective on the pharmaceutical industry.
