The Federal Reserve went ahead with another quarter of a percentage point rate hike this week despite the economy witnessing the biggest banking crisis since 2008. The risk of a recession is rising as the Fed looks to increase interest rates further, and banks' lending standards are expected to be tightened.
Amid the uncertainty, investing in fundamentally large-cap solid pharma stocks Johnson & Johnson (JNJ), Merck & Co., Inc. (MRK), and Bristol-Myers Squibb Company (BMY) could help protect one’s portfolio as these stocks are well positioned to deliver stable returns regardless of economic conditions partly thanks to the inelastic demand for their products.
Before discussing what makes these stocks wise additions to one’s portfolio, let’s see what is influencing investor sentiment.
Plunging bond yields, falling oil prices, and heightened volatility all signal that investors fear a recession could be around the corner. Goldman Sachs has now raised their recession expectations to 35% from the previous prediction of 25%.
Consumers are more likely to cut down their discretionary spending during a recession. However, the pharma industry is known to perform well during a recession, as drugs and therapies cannot be forgone. The demand for medicines is relatively inelastic. This helps pharma companies maintain their margins during a slowdown.
Moreover, the long-term prospects of pharma companies look bright due to an aging population and rising lifestyle diseases. Investors’ interest in pharmaceutical stocks is evident from the VanEck Vectors Pharmaceutical ETF’s (PPH) 10.3% returns over the past six months.
Let’s delve deeper into the fundamentals of JNJ, MRK, and BMY.
Johnson & Johnson (JNJ)
JNJ researches, develops, manufactures, and sells various products in the healthcare field worldwide. It operates under three segments: Consumer Health, Pharmaceutical, and MedTech. It has a market capitalization of $471.50 billion.
On December 22, 2022, JNJ announced the completion of its acquisition of Abiomed. JNJ’s CEO, Joaquin Duato, said, “This acquisition marks another important step on Johnson & Johnson’s path to accelerating growth in our MedTech business and delivering innovative medical technologies to more people around the world.”
Over the last three years, JNJ’s dividend payouts have grown at a 6% CAGR. Its four-year average dividend yield is 2.61%, and its forward annual dividend of $4.52 per share translates to a 2.99% yield. It paid a quarterly dividend of $1.13 per share on March 7, 2023.
In terms of the trailing-12-month gross profit margin, JNJ’s 67.36% is 20% higher than the 56.13% industry average. Likewise, its 0.51x trailing-12-month asset turnover ratio is 49.9% higher than the industry average of 0.34x. Furthermore, the stock’s trailing-12-month levered FCF margin came in at 20.21% compared to the negative 3.87% industry average.
JNJ’s U.S. sales increased 2.9% year-over-year to $12.52 billion for the fourth quarter ended January 1, 2023. The company’s adjusted net earnings increased 9.5% year-over-year to $6.22 billion. Also, its adjusted EPS came in at $2.35, representing an increase of 10.3% year-over-year.
For the fiscal year ended January 1, 2023, JNJ’s worldwide sales rose 1.3% year-over-year to $94.94 billion. The company’s adjusted net earnings increased 3.2% over the prior-year period to $27.04 billion. In addition, its adjusted EPS came in at $10.15, representing an increase of 3.6% year-over-year.
Analysts expect JNJ’s revenue for the quarter ending March 31, 2023, to increase 0.7% year-over-year to $23.58 billion. Its EPS for the quarter ending June 30, 2023, is expected to increase 0.9% year-over-year to $2.61. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined 4.2% to close the last trading session at $151.13.
JNJ’s strong fundamentals are reflected in its POWR Ratings. The company has an overall rating of A, which translates 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 Value and Quality. Within the Medical - Pharmaceuticals industry, it is ranked #6 of 167 stocks. Click here to see the additional POWR Ratings of JNJ for Growth, Momentum, and Sentiment.
Merck & Co., Inc. (MRK)
MRK is a global healthcare company that offers solutions through its prescription medicines, vaccines, biological therapies, and animal health products. The company operates in the Pharmaceutical and Animal Health segments. It has a market capitalization of $264.60 billion.
On January 11, 2023, MRK announced the successful completion of the cash tender offer, through a subsidiary, for all the outstanding shares of common stock of Imago BioSciences, Inc. The acquisition will extend MRK’s growing hematology portfolio.
MRK’s annual dividend of $2.92 yields 2.80% on the current share price. The company’s dividend payouts have increased at an 8.7% CAGR over the past three years and a 9.4% CAGR over the past five years. Its four-year average yield came in at 2.95%. It is expected to pay a quarterly dividend of $0.73 per share on April 10, 2023.
In terms of the trailing-12-month gross profit margin, MRK’s 70.98% is 26.4% higher than the 56.13% industry average. Likewise, its 41.08% trailing-12-month EBITDA margin is significantly higher than the industry average of 3.35%. Furthermore, the stock’s trailing-12-month levered FCF margin came in at 21.41% compared to the negative 3.87% industry average.
MRK’s sales for the fiscal year ended December 31, 2022, increased 21.7% year-over-year to $59.28 billion. The company’s non-GAAP net income rose 39.5% over the prior-year period to $19 billion. Also, its non-GAAP EPS came in at $7.48, representing an increase of 39.3% year-over-year.
Analysts expect MRK’s EPS and revenue for the quarter ending September 30, 2023, to increase 5.5% and 1.3% year-over-year to $1.95 and $15.16 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 30.7% to close the last trading session at $104.23.
MRK’s POWR Ratings reflect solid prospects. The company has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Value, Stability, Sentiment, and Quality. It is ranked #18 in the same industry. Click here to see other ratings of MRK for Growth and Momentum.
Bristol-Myers Squibb Company (BMY)
BMY develops, licenses, manufactures, and markets biopharmaceutical products worldwide. It offers products for hematology, oncology, cardiovascular, immunology, fibrotic, neuroscience, and COVID-19. It has a market capitalization of $140.57 billion.
On January 3, 2023, BMY announced that it had completed the previously announced sale of the manufacturing facility in Syracuse, New York, to South Korea-based LOTTE BIOLOGICS. This divestiture is part of the evolution of its manufacturing facilities to support its current product portfolio. Also, BMY entered into a contract manufacturing organization (CMO) relationship with LOTTE.
BMY’s annual dividend of $2.28 yields 3.40% on the current share price. The company’s dividend payouts have increased at a 9.2% CAGR over the past three years and a 6.9% CAGR over the past five years. Its four-year average yield came in at 3.02%. It is expected to pay a dividend of $0.57 per share on May 1, 2023.
In terms of the trailing-12-month gross profit margin, BMY’s 78.81% is 40.4% higher than the 56.13% industry average. Likewise, its 0.45x trailing-12-month asset turnover ratio is 30.6% higher than the industry average of 0.34x. Furthermore, the stock’s trailing-12-month EBIT margin came in at 21.40% compared to the negative 0.93% industry average.
For fiscal 2022, BMY’s total revenues declined 0.5% year-over-year to $46.16 billion. On the other hand, the company’s non-GAAP net earnings attributable to BMS increased 2.8% from the prior-year period to $16.53 billion. In addition, its non-GAAP EPS came in at $7.70, representing an increase of 7.5% year-over-year.
For the quarter ending March 31, 2023, BMY’s EPS is expected to increase 2.1% year-over-year to $2. Its revenue for the quarter ending June 30, 2023, is expected to increase 0.6% year-over-year to $11.96 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has declined 6.2% to close the last trading session at $66.98.
BMY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked #2 in the Medical - Pharmaceuticals industry. It has an A grade for Value and a B for Growth, Stability, Sentiment, and Quality. To see BMY’s rating for Momentum, click here.
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JNJ shares rose $0.07 (+0.05%) in premarket trading Friday. Year-to-date, JNJ has declined -14.05%, versus a 2.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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