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JNJ vs. NVS: Which Stock is Better Pre Q1 Earnings?

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Big banks are starting the second-quarter earnings season this week, and results from pharma giants are due over the next few weeks, making this a good time to shift attention to the reporting cycle from tariff concerns. Although trade woes are a concern for pharma companies as around 55% of their revenues are generated from foreign markets, the overall earnings number is expected to be upbeat.

The healthcare sector has jumped 6.5% in the last three months, better than the S&P 500’s 5% rally. Signs of the sector’s success became more evident in the last three months, when the NYSE ARCA Pharmaceutical Index and the Nasdaq Biotechnology Index gained 3.1% and 11.7%, respectively.

With Johnson & Johnson (JNJ - Free Report) and Novartis AG (NVS - Free Report) scheduled to report on Jul 17 and Jul 18, respectively, this may be a good time to figure out which of these is a better stock. Both stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other major earnings scheduled next week include UnitedHealth Group Incorporated (UNH - Free Report) and Microsoft Corporation (MSFT - Free Report) .

Price Performance

Johnson & Johnson has seen a gain of 4.18% over the last one month, while Novartis has advanced 4.16%. So Johnson & Johnson is a winner in this respect with better returns than both rival Novartis and the broader industry, which rose 3.70% during the same period.

Valuation

The most-appropriate ratio to evaluate these two drug makers is perhaps EV/EBITDA. This metric is usually used to compare two stocks in the same industry. It is superior to other metrics such as P/E because it is not affected by the different capital structures of the two companies.

Coming to the two pharma majors, Novartis with an EV/EBITDA value of 12.10 is overvalued compared to the broader industry, which has a valuation of 11.98. However, Johnson & Johnson holds an edge over both Novartis and industry here with a lower EV/EBITDA value of 7.92.

Dividend Yield

Over a year, Johnson & Johnson and Novartis have offered dividend yields of 2.82% and 2.42%, respectively, while the industry’s dividend yield was 3.11%. Although the industry’s dividend yield is slightly higher than both the pharma giants, between the individual stocks, Johnson & Johnson has taken the lead here too.

Net Margin

The pharmaceutical industry enjoys higher profit margins than several other sectors. This is possibly one of the reasons why critics of the sector continually draw attention to allegedly exorbitant drug pricing, which helps the sector maintain its steep margins.

With a net margin value of 22.77%, Novartis underperforms its bigger rival Johnson & Johnson, which has a net margin value of 26.23%. The broader industry’s net margin value is equal to that of Johnson & Johnson.

Return on Equity

Return on equity (ROE) is one of the key financial ratios for pharma companies as these entities employ huge amounts of capital to bring their products to the market. In this respect, using ROE will help in evaluating the company’s ability to generate ample profits from its equity capital.

The broader industry has ROE of 29.71%. Coming to the two stocks, Johnson & Johnson with an ROE of 30.65% is clearly at an advantage over both the industry and Novartis, which has ROE of 16.23%.

Earnings History, ESP and Estimate Revisions

Considering a more comprehensive earnings history, Johnson & Johnson has delivered positive surprises in each of the four quarters, with an average earnings surprise of 2.86%. On the other hand, Novartis has delivered positive surprises in the prior four quarters, with an average earnings surprise of 3.34%.

When considering Earnings ESP, Johnson & Johnson has an ESP of +0.37%, while Novartis has an ESP of -2.68%. Johnson & Johnson’s earnings estimates for the current year have increased by 0.3% over the last 90 days, while the same metric for Novartis has declined by 1.3%. 

Conclusion

Our comparative analysis shows that Novartis holds an edge over Johnson & Johnson when considering only earnings history. However, when considering price performance, valuation, ROE, and net margins Johnson & Johnson is at an advantage over Novartis. Additionally, Johnson & Johnson also has a better dividend yield than Novartis and with a more comprehensive look at its estimate revisions, Johnson & Johnson is clearly the better stock.

What clinches the case in favor of Johnson & Johnson at this point in time is that it has a better ESP, which is a leading indicator of a likely positive surprise. This is why it might be wise to bet on Johnson & Johnson over Novartis as both prepare to report earnings next week.

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