Stock of the Week - Johnson & Johnson (05.04.2025)

Johnson & Johnson (JNJ.US) shares are under pressure following a significant legal setback, as a federal bankruptcy judge rejected the company's third attempt to use bankruptcy proceedings to resolve thousands of talc-related lawsuits. This ruling sent shares tumbling by as much as 5.6% in a single day, marking the stock's biggest intraday decline since March 2020, and forcing the healthcare giant to pivot toward fighting these cases individually in courts across the country.

Talc Litigation Creates Significant Uncertainty 

US Bankruptcy Judge Christopher Lopez dismissed J&J's bankruptcy strategy to resolve approximately 60,000 claims alleging its baby powder caused ovarian cancer. With this ruling, J&J must now litigate individual claims, potentially facing more than 90,000 lawsuits. While J&J had previously earmarked $9 billion for victims, Bloomberg Intelligence suggests costs could reach $11 billion if 70% of plaintiffs settle. Despite these concerns, J&J executives maintain confidence in the company's 2025 guidance and 2025-2030 projections, with plans to pursue legal strategies in federal court where they believe plaintiffs cannot meet the burden of proving scientific validity.

Strategic US Manufacturing Investment

In an apparent move to align with the Trump administration's reshoring priorities, J&J recently announced plans to invest more than $55 billion in US manufacturing over the next four years. This includes a new $2 billion facility in North Carolina expected to create over 500 permanent positions. The announcement follows similar moves by competitors like Eli Lilly, as pharmaceutical companies face potential 25% tariffs on imported drugs and increasing pressure to repatriate manufacturing operations.

Growth Through Acquisition and Pipeline Development

J&J completed its $14.2 billion acquisition of Intra-Cellular Therapies, adding the antipsychotic Caplyta to its neuroscience portfolio. The company expects this acquisition to boost 2025 sales growth by approximately 0.8% with about $700 million in incremental sales. Meanwhile, clinical data shows J&J's Rybrevant + Lazcluze combination demonstrating superior survival in lung cancer patients compared to competing therapies, with projections suggesting the combination could extend median overall survival by at least 12 months in a disease where only 20% of patients currently live beyond five years.

Additional Challenges and Market Outlook

Beyond talc litigation, J&J faces a recent $1.64 billion judgment against its Janssen unit for off-label marketing of HIV drugs and the looming loss of exclusivity for Stelara ($10.4 billion in 2024 sales). The company must also navigate potential pharmaceutical tariffs and broader restructuring at HHS. Despite these challenges, some analysts remain cautiously optimistic, with TD Cowen maintaining its buy rating and suggesting that "any stock weakness in response to Monday's decision will be limited and ultimately short-lived." The stock has struggled over the past year, down 8.8% in the 12 months prior to the latest setback, as investors weigh litigation concerns against the company's strategic acquisitions and pipeline potential.

Valuation

At a current price of $155.36, Johnson & Johnson trades at moderate premiums to pharmaceutical peers, with a P/E of 20.37 versus the industry median of 12.19 and forward P/E of 13.80 compared to the median 8.83. This premium reflects JNJ's stable business model and diversified revenue streams.

Comparative Valuation

Compared to peers (Abbvie, Merck, Pfizer), JNJ shows mixed positioning: above median on P/E (20.37 vs 12.19), slightly above on P/BV (5.16 vs 4.75), in line on P/S (4.16 vs 4.03 average), and higher on P/FCF (18.63 vs 14.14 median).

Mean-based valuations suggest potential prices from $117.10 to $1,146.90, while more conservative median-based models indicate $91.73 to $141.23. Cap-weighted approaches suggest $129.60 to $1,690.91, with most methodologies indicating undervaluation.

Source: Bloomberg Finance LP, XTB Research

DCF Valuation

Our terminal WACC analysis indicates JNJ appears fairly valued if it maintains terminal revenue growth of 3.3-3.7% with a WACC of 7.8-8.2%, implying valuation between $244.08-$254.80. Operating margin analysis suggests 15-17% margins with 20-22% revenue growth would support the current price range.

Johnson & Johnson appears moderately undervalued at $155.36. Our DCF-based valuation suggests a fair value of $235-255, representing 51-64% upside potential assuming 3.3-3.7% terminal growth and 7.8-8.2% WACC. JNJ offers long-term investors an attractive balance of stability, income, and modest growth potential.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Johnson & Johnson (D1 Interval)

The stock is trading above the 23.6% Fibonacci retracement level, which has acted as strong support. Meanwhile, the 38.2% Fibonacci retracement level is expected to serve as a strong resistance zone. The RSI is in short-term bearish divergence, forming a lower low, while the MACD is widening after a bearish crossover.