Johnson & Johnson stock is approaching its all-time high again. Should a breakout be expected?

Unlike other pharmaceutical companies, Johnson & Johnson (NYSE: JNJ) did not benefit significantly from its vaccine during the coronavirus pandemic. As a result, its shares have been trading between 140 and 170 USD per share since January 2021. The company’s shareholders can only earn on dividends or speculate on shares within this range. The release of the Q2 2024 report triggered another wave of growth in their price, arousing hope for breaking above the trading range and surpassing the all-time high.

This article will provide a fundamental analysis of Johnson & Johnson’s report, a technical analysis of JNJ shares and outline the company’s potential future revenue growth areas.

Johnson & Johnson’s business model

Johnson & Johnson is one of the world’s largest companies involved in the healthcare and consumer goods sector. It has a diversified business model and sells its products in three main segments:

1. Pharmaceutical Segment
   The main revenue stream is the sale of prescription drugs. The key areas include oncology, immunology, neurology, infectious diseases, cardiology, metabolism, and vaccines.
2. Medical Devices Segment
   The main revenue stream comes from selling medical equipment and devices. The key areas include surgery, orthopaedics, interventional solutions, and eye surgery.
3. Consumer Health Segment
   The main revenue stream is the sale of health and personal care products. The key areas include skin care products, baby products, oral care products, dietary supplements, and over-the-counter drugs.

Johnson & Johnson's business model is based on diversifying revenues across three segments, enabling the company to earn not only from pharmaceuticals but also from the production and sale of medical equipment.

The consumer segment is also a significant area for revenue diversification as it covers products that are sold outside of medical centres and do not require prescriptions.

Johnson & Johnson’s Q2 2024 report

Johnson & Johnson released its Q2 2024 report on 17 July 2024. In addition to the main indicators, the company also publishes data on the Innovative Medicine (pharmaceuticals, health and personal care products) and MedTech (medical devices and equipment) segments. Below is the data compared to the corresponding period last year:

• Revenue – 22.45 billion USD (+4.3%)
• Net income – 4.68 billion USD (-8.9%)
• Earnings per share – 2.82 USD (+10.2%)
• Operating margin – 25.6% (-370 basis points)
• Innovative Medicine earnings – 14.49 billion USD (+5.5%)
  US – 8.51 billion USD (+8.9%)
  International – 5.98 billion USD (+1.1%)
• MedTech earnings – 7.96 billion USD (+2.2%)
  US – 4.05 billion USD (5.7%)
  International – 3.89 billion USD (-1.3%)

The report shows a significant increase in sales of the following drugs:

• SPRAVATO (neuroscience) – up 60.8% due to increased trust from doctors and patients
• CARVYKTI (oncology) – up 59.9% due to increased production capacity and robust demand
• ERLEADA (oncology) – up 32.4% due to an even larger market share
• TREMFYA (immunology) – up 30.7% due to successful clinical trials and expanded indications for use
• DARZALEX (oncology) – up 21.3% after market expansion and due to new therapeutic applications

All the above products contributed to an 8.8% increase in global operating sales, partially offsetting reduced demand for other drugs. As the report shows, the US market remains the key source of revenue for Johnson & Johnson, and it was this market that saw growth across all segments last quarter.

Johnson & Johnson management’s comments on the report

Johnson & Johnson management views the Q2 2024 performance as strong and is eagerly awaiting the 2024 results, expecting to see 13-year growth continuing. Specifically, Johnson & Johnson Chairman and CEO Joaquin Duato noted that the Q2 performance reflects the relentless focus on advancing the next wave of medical innovation, which resulted in significant growth in sales and the adjusted operating earnings per share. With a robust product portfolio, the integration of Shockwave, and the continued expansion of newly launched products, the company has a strong foundation for near- and long-term growth.

Johnson & Johnson 2024 forecast

Johnson & Johnson provided a positive outlook for 2024, expecting continued growth in both key segments, Innovative Medicine and MedTech.

The company expects the full-year 2024 revenues to be in the range of 89.30 billion to 90.30 billion USD, representing growth of approximately 4.0-5.0% from the previous year. EPS is projected to range between 10.70 and 10.80 USD, up 2.5-3.5% from the 2023 figure.

In the Innovative Medicine segment, growth is expected to continue, driven by strong sales of drugs such as Carvykti, Stelara, and Darzalex, the launch of new products, and expanding indications for existing drugs.

The MedTech segment is projected to see a steady uptick, particularly in surgery and orthopaedics divisions due to the expansion of the product portfolio and the integration of new acquisitions.

Johnson & Johnson management emphasises that with a diversified product portfolio and active investment in development, the company is well-positioned for long-term growth.

Potential revenue growth areas for Johnson & Johnson

It was announced in August 2024 that the company had entered into a final agreement to acquire V-Wave, a privately held company that develops innovative solutions to treat patients with heart failure. V-Wave specialises in creating a cardiac implant meant to reduce heart failure and other related conditions. The deal is expected to increase Johnson & Johnson's EPS by approximately 0.24 USD, indicating the company’s confidence in the potential impact of the V-Wave technology on the market.

On 21 August, Johnson & Johnson received FDA approval for its lung cancer drug RYBREVANT. Thanks to this, the company intends to compete with the AstraZeneca drug, which has so far been considered the standard in the treatment of non-small cell lung cancer. Johnson & Johnson is now awaiting the European Commission’s decision on the drug, which will give it access to the European market.

It was announced on 27 August that the BALVERSA drug was approved by the European Commission for the treatment of adult patients. The drug belongs to the class of FGFR inhibitors and can slow or stop the growth of cancer cells. Its sales in the EU will significantly increase Johnson & Johnson's revenues as it will open access to a large number of European patients.

J&J has a total of 9 drugs under approval in 2024 and plans to apply for 15 new medicines. Another 10 drugs are in the third and penultimate trial phase. Thus, the company has enough drugs that have the potential to boost future revenues.

The news about the development of obesity and diabetes mellitus drugs could be a strong driver of growth in Johnson & Johnson’s stock price. Companies such as Lilly (Eli) & Co (NYSE: LLY) with Mounjaro and Novo Nordisk (NYSE: NVO) with Wegovy are active in this area, which propelled their share value by more than 160% over the past two years. Even an announcement of Johnson & Johnson’s intention to enter this market may become a strong catalyst for the growth of the company’s shares.

Arguments in favour of investing in Johnson & Johnson shares

Drug portfolio. Johnson & Johnson has a broad and diversified drug portfolio, covering various therapeutic areas such as oncology, immunology, neurology, infectious and cardiovascular diseases. Their critical importance to patients ensures steady demand, making revenues from these medicines less susceptible to economic fluctuations and more sustainable in the long term.

Dividend aristocrat. Johnson & Johnson is a dividend aristocrat, increasing dividend payouts for over 50 consecutive years. This makes the company’s shares attractive to long-term investors, particularly those seeking stable earnings. The company’s robust dividend policy demonstrates its financial stability and confidence in future earnings, which is important for investors focused on stable and predictable investments.

Recognisable brand. Johnson & Johnson is one of the world’s most recognisable brands, associated with quality and safety. With its long history and market credibility, the company has earned unique trust of consumers and medical professionals. This brand equity plays an important role in maintaining and expanding the company’s market share and in successfully bringing new products to the market. Brand recognition also helps J&J compete well and maintain high levels of loyalty among consumers.

Business margin. Johnson & Johnson’s operating margin reached 25.9% in Q2 2024, meaning the company controls its costs well and optimises processes of producing and selling its products. This aspect is especially important in the pharmaceutical and medical industry, where significant expenses are associated with research, development of new drugs and regulatory procedures. To summarise, the 25.9% operating margin is a sign of the company’s financial health and its ability to maintain a high level of profitability in the long term.

Arguments against investing in Johnson & Johnson shares

Intense competition. The pharmaceutical sector is highly competitive. Johnson & Johnson faces serious rivals such as Merck & Co Inc (NYSE: MRK), Novartis AG (NYSE: NVS), Pfizer Inc. (NYSE: PFE) and others, which are also actively developing new drugs and solutions to treat diseases. Competitors may offer more effective or less expensive alternatives, which could reduce J&J's market share and exert pressure on prices. This will ultimately affect the company’s margins and profitability.

Expiry of drug licences. Like other pharmaceutical companies, Johnson & Johnson runs the risk of patent expiration on key drugs. When patents expire, the company loses the exclusive right to sell these drugs, and generic products enter the market, slashing prices and revenues from these products. The expiry of patent protection for crucial drugs may result in significant revenue losses unless the company can offset them with new products.

High research and development costs. Innovation in the pharmaceutical and medical industry requires significant investment in research and development (R&D). Johnson & Johnson’s R&D costs reached approximately 15.08 billion USD in 2023, accounting for 17% of total revenues. High spending is necessary to maintain competitiveness and develop new products but it also comes with increased risks. Research does not always meet expectations and clinical trials can fail, leading to substantial losses.

Technical analysis of Johnson & Johnson stock

Johnson & Johnson shares have been trading between 144 USD and 170 USD since January 2021. The COVID-19 pandemic had no noticeable positive impact on the company’s shares although J&J developed and marketed the Janssen coronavirus vaccine.

The release of the Q2 2024 report drove growth in the stock price to the range’s upper boundary at 170 USD. However, J&J failed to break above the resistance level due to the negative sentiment in the stock market, which has sent the Dow Jones Industrial (US30) index down by more than 3% since early September. The following scenarios can be considered in this situation.

The primary forecast for Johnson & Johnson stock suggests another decline to the lower boundary of the range at 144 USD, after which growth could resume. The stock may have the potential to surpass the 170 USD resistance level this time.

Technical analysis and forecast for JNJ stock

An optimistic but secondary forecast for Johnson & Johnson stock suggests a breakout above the 170 USD resistance level, with the quotes potentially rising by the channel value to 196 USD. This scenario may be implemented if the optimistic sentiment prevails in the market following a US Federal Reserve interest rate cut at its meeting on 18 September.

Summary

The operating margin of 25.9% indicates the company’s good financial standing as the management skillfully manoeuvres between investing in research and monetising existing products. Investors who bought shares after 2021 can only settle for dividend income as the stock price remained barely unchanged over this period. The company buys back shares but does so at its own discretion, with the repurchase spending sometimes not exceeding 200 million USD per quarter, which has virtually no effect on the share price.

There is no stunning news that could lead to mass migration of investors to the company’s shares, and hence there are no expectations of explosive growth. However, J&J shares are suitable for investors seeking long-term investments and dividend yield. A breakout above an all-time high of 173 USD may lead to a gradual increase in the stock price as J&J is a profitable company and has a good financial position with 25 billion USD of free cash, part of which may be used to buy back shares in a favourable scenario.