Johnson & Johnson (JNJ) and Pfizer (PFE) are leaders in the pharmaceutical/healthcare field, and both are sought after growth stocks with a bonus of solid dividend yields, but does one come out ahead?
Both companies have enjoyed plenty of success recently: each is at or near 52-weeks highs, and both companies have dividend yields above 3% (Pfizer barely holds the lead at about 3.6% as of January 2013). What sets the companies apart? Below is a brief description of the current climate and position of each company, followed by a discussion and comparison of both.
Pfizer has faced several setbacks recently, which may pose problems down the road. First, in November 2011, the patent on a key drug, Lipitor, expired, and the company also lost exclusivity for Torisel in the U.S. and Xalatan in Europe. Additionally, trouble with Viagra is expected to cost the company revenue in the coming year, as overseas competitors, primarily in India, are producing generic versions of Viagra. To make this worse, a ruling from the Supreme Court in Canada voided the legitimacy of Pfizer's patent on the drug. On the bright side, however, Pfizer still has some winners including Lyrica and Celebrex which helped offset some of its losses, and will continue to bring in large revenues, while recent FDA approvals for four drugs will add additional revenue. Pfizer is also fostering revenue growth in emerging markets such as China, Mexico, Russia and Turkey. And in November 2012, Pfizer acquired NextWave Pharmaceuticals, Inc. which recently received FDA approval for Quillivant XR, an ADHD treatment.
Of the two companies, Pfizer posted lower quarterly revenue numbers at just under $14 billion. However, it also posted the higher quarterly profit margin at 23%, despite a lower return on equity at 11.6%. The company's trailing twelve month P/E of approximately 21 is above the industry average of 17, and its book value of $11 per share is significantly below the industry average of 20.
Johnson & Johnson
Johnson & Johnson, the more diverse company of the two, also made a recent acquisition of Synthes, Inc., which specializes in skeletal implants, and is expecting a boost in revenue for its Medical Devices & Diagnostics (MD&D) business unit as a result. Last year, its quickest growing unit, Pharmaceuticals, saw an increase of 6% in operational growth. The Consumer business unit saw a small decline in operational growth (most likely a sign of the times as consumer spending remains stagnant), while MD&D saw a slight increase in growth. However, on the downside, Johnson & Johnson has been battling quality control issues resulting in massive product recalls over the last several years, and the company is currently facing litigation involving its Gynecare Prolift implantation device, as patients have suffered organ damage, severe pain and other complications from the device.
Johnson & Johnson posted the higher revenue numbers at $17 billion with a profit margin of 17.4%. At 14% ROE, Johnson & Johnson was just under the industry average of 16%, and at 21, its book value was just over average. Although Johnson & Johnson does have the higher P/E ratio at 24 and the higher price to book ratio, this may likely be as a result of its all around strong financials and growth outlook.
Who Comes Out Ahead?
Johnson & Johnson is a stronghold in the Consumer Goods market, but as much of Europe and the U.S. face looming debt burdens, many consumer goods companies are feeling the pain. Despite the fact that low interest rates traditionally correspond to higher consumer spending, consumer spending has remained fairly stagnant, despite rates being at historic lows.
Looking at the trends of both companies, perhaps we can decipher which may be the best buy at this point. Both Pfizer's and Johnson & Johnson's SMAs are indicating upward trends, and they are in buy territory per their respective MACD signals. Pfizer's RSI is approaching the overbought signal (but is not there yet, indicating it still has room to rise) at 69 while Johnson & Johnson's RSI has crossed over into the overbought territory and is due for a fall.
Johnson & Johnson has a strong market position and product profile despite several setbacks from product recalls overall the last several years, but is also facing litigation and quality issues. This, combined with some overbought signals, puts Johnson & Johnson on the hold list. However, Pfizer, with its high profit margin and technical indicators in buy territory, may find itself on the buy list. Yet if there is a pullback in the industry and these stocks experience a decline, Johnson & Johnson could quickly become a good buy as well for many investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.