The healthcare and pharmaceutical industries experience consistent demand due to factors such as an aging population, rising incidence of chronic illnesses, and the overall growth in the global population. In this context, backed by solid fundamentals and a strong market presence, two pharma stocks, Johnson & Johnson (JNJ) and Novartis AG (NVS), could be solid portfolio additions this month.
Although investing in pharma stocks can serve as a potential hedge against market volatility, not all stocks are worth including in your portfolio. Therefore, fundamentally weak pharma stock SNDL Inc. (SNDL) could be avoided.
The pharmaceutical industry is experiencing significant growth, with sales projected to hit $1.50 trillion in 2023. This growth is attributed to various factors, including advancements in medical research, rising demand for healthcare services worldwide, and the development of innovative therapies and treatments. The industry is continually evolving to meet the increasing healthcare needs of the global population.
Moreover, the pharmaceutical industry is making substantial investments in research and development, with a specific focus on new drug discovery, integrating advanced technologies, exploring gene therapy, and enhancing aftercare services. The global drug discovery market is projected to reach around $133.11 billion by 2032, exhibiting a CAGR of 9.2% from 2023 to 2032.
Additionally, personalized medicines have gained prominence. This emphasizes a deeper comprehension of illnesses and their management through the utilization of advanced analytics, customized medicines, patient data, and other innovative options. The global personalized medicine market is projected to surpass $5.70 trillion by 2030, growing at an impressive CAGR of 11.6%.
Given the innovative methods coupled with the industry’s defensive nature, the pharmaceutical industry will most likely continue to remain in a favorable spot. To that end, let us delve deeper into the fundamentals of the featured stocks in detail:
Stocks to Buy:
Johnson & Johnson (JNJ)
JNJ is a renowned healthcare products company engaged in research and development, manufacture and sale of a range of products in the healthcare field. It operates through three segments: Consumer Health; Pharmaceutical; and MedTech.
On July 20, JNJ declared a quarterly dividend of $1.19 per share on the company’s common stock, payable to its shareholders on September 7, 2023.
The company’s annual dividend of $4.76 translates to a 2.82% yield on the prevailing prices, while its four-year average dividend yield is 2.62%. Its dividend payouts have grown at CAGRs of 5.9% and 6% over the past three and five years, respectively. Also, it has a record of 60 years of consecutive dividend growth.
On May 2, Janssen Biotech, Inc., one of the Janssen Pharmaceutical Companies of JNJ, entered into a global collaboration and license agreement with Cellular Biomedicine Group Inc. (CBMG) to work together on the development, manufacturing, and commercialization of next-generation Chimeric Antigen Receptor (CAR) T-cell therapies. The main focus of these therapies is to treat B-cell malignancies.
In terms of the trailing-12-month EBITDA and gross profit margins, JNJ’s 35.09% and 67.50% are 792.7% and 21.4% higher than the 3.93% and 55.60% industry averages, respectively. Likewise, its 0.53x trailing-12-month asset turnover ratio is 49.3% higher than the 0.35x industry average.
For the fiscal second quarter, which ended June 30, 2023, JNJ’s reported sales increased 6.3% year-over-year to $25.53 billion, while its gross profit came in at $17.32 billion, up 7.6% year-over-year. The company’s adjusted net earnings and adjusted EPS increased 6.5% and 8.1% from the prior-year quarter to $7.36 billion and $2.80, respectively.
Street expects JNJ’s EPS and revenue for the third quarter (ending September 30, 2023) to increase 4.9% and 5.2% year-over-year to $2.68 and $25.02 billion, respectively. Moreover, the company has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 3.2% over the past three months to close the last trading session at $169.91.
JNJ’s POWR Ratings reflect this robust outlook. The stock has an overall A rating, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Stability and a B for Growth, Sentiment, and Quality. In the 165-stock Medical - Pharmaceuticals industry, it is ranked #3. Click here to see JNJ’s ratings for Value and Momentum.
Novartis AG (NVS)
Headquartered in Basel, Switzerland, NVS researches, develops, manufactures, and markets healthcare products in Switzerland and internationally. It operates through two segments: Innovative Medicines and Sandoz.
On July 20, Sandoz revealed its plans for a substantial investment of around $90 million in its facility located in Ljubljana, Slovenia. The purpose of this investment is to establish a dedicated Sandoz Biopharma Development Center by the year 2026. This move highlights Sandoz's commitment to advancing its biosimilar portfolio and contributing to the pharmaceutical industry's innovation and growth.
In the same month, NVS acquired DTx Pharma, a biotechnology company located in San Diego. This acquisition represents an expansion of NVS’ capabilities in the field of RNA-based therapeutics. By integrating DTx's FALCON platform into its existing siRNA toolkit, NVS is poised to further enhance its capabilities in developing advanced RNA therapies.
The stock’s trailing-12-month gross profit and EBITDA margins of 71.15% and 37.74% are 27.9% and 859.9% higher than the 55.60% and 3.93% industry averages. Its trailing-12-month asset turnover ratio of 0.45x is 27.9% higher than the industry average of 0.35x.
In the fiscal second quarter that ended June 30, 2023, NVS’ net sales increased 6.6% year-over-year to $13.62 billion. Its operating income grew 31.1% from the year-ago value to $2.92 billion.
During the same period, its net income and EPS came in at $2.32 billion and $1.11, representing 36.7% and 44.2% year-over-year increases, respectively. In addition, its free cash flow amounted to $3.28 billion.
The consensus EPS estimate of $1.78 for the third quarter (ending September 30, 2023) represents a 12.7% improvement year-over-year. The consensus revenue estimate of $13.82 billion for the current quarter reflects a 10.2% increase from the same period last year. Additionally, the company surpassed the EPS estimates in three of the trailing four quarters, which is promising.
Over the past nine months, the stock has gained 27.5% to close the last trading session at $102.75.
It’s no surprise that NVS has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Growth and Stability and a B for Value, Sentiment, and Quality. Out of 165 stocks in the same industry, it is ranked #2.
In addition to the POWR Ratings we stated above, we also have NVS’ rating for Momentum. Get all NVS ratings here.
Stock to Avoid:
SNDL Inc. (SNDL)
Headquartered in Calgary, Canada, SNDL is a private-sector liquor and cannabis retailer with retail banners that include Ace Liquor, Wine and Beyond, Liquor Depot, Value Buds, and Spirit leaf. It operates through four segments: Liquor Retail; Cannabis Retail; Cannabis Operations; Investments and Corporate.
Its trailing-12-month gross profit margin of 18.89% is 66% lower than the 55.60% industry average. Likewise, its trailing-12-month Capex/Sales of 1.24% is 73.6% lower than the 4.68% industry average. Also, its trailing-12-month cash per share of $0.61 is 53.4% lower than the industry average of $1.30.
SNDL’s net revenue for the first quarter (ended March 31, 2023) came in at $202.45 million, while its loss from operations amounted to $32.02 million.
During the same period, the company’s net loss stood at $36.14 million and $0.14 per share, respectively. In addition, its cash and cash equivalents came in at $213.25 million, declining 23.7% compared to $279.59 million as of December 31, 2022.
For the fiscal year ending December 31, 2023, SNDL’s revenue is projected to be $733.04 million. Moreover, the company failed to surpass EPS estimates in each of the trailing four quarters, which is disappointing.
SNDL’s shares have slumped 33.8% over the past nine months to close the last trading session at $1.51.
SNDL’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
It has a D grade for Momentum, Stability, and Quality. Within the same industry, it is ranked #156. Click here to see the other ratings of SNDL for Growth, Value, and Sentiment.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
JNJ shares were trading at $169.94 per share on Thursday morning, up $0.03 (+0.02%). Year-to-date, JNJ has declined -2.38%, versus a 18.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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