Source: PaxForex Premium Analytics Portal, Fundamental Insight
After plunging more than 19% last year, the S&P 500 Index is off to a good start in 2023. But Johnson & Johnson is doing just the opposite: the health care giant's stock is up 3% in 2022, but so far this year has been down.
Even the better-than-expected outlook for the new year in J&J's Q4 update failed to make investors happy. Today, however, Johnson & Johnson stock stands a good chance of recovering from a poor start to 2023. Below, we'll look at a few reasons.
- Coronavirus' declining impact.
The impact of COVID-19 continued to affect Johnson & Johnson in the last quarter. The company reported that Q4 sales fell 4.4% YoY to $23.7 billion. One of the two factors in this decline was the decline in sales of the COVID-19 vaccine.
No, Johnson & Johnson is unlikely to experience a significant jump in sales of its vaccine. However, YoY comparisons should improve in 2023.
Yet declining vaccine revenues were not J&J's only problem with the coronavirus. The vaccine had a negative impact on sales of the company's pulmonary hypertension drugs and on its medical technology business (especially in China).
Now, however, the worst may be over. One of the Chinese government's leading epidemiologists even recently said that the likelihood of a major upsurge of the disease in China over the next few months is slim since so many people in the country have already been sickened.
- The potential for a weakening U.S. dollar
An unfavorable foreign exchange rate was another major factor in Johnson & Johnson's Q4r sales decline. The company said its Q4 sales were up slightly YoY in constant currency.
This currency negative front is due to the strong U.S. dollar. And the strength of the dollar is partly a result of the U.S. Federal Reserve's aggressive interest rate hikes.
The strong dollar hurts J&J because nearly half of its sales come from international markets. The company receives payments in other currencies but must convert them to U.S. dollars for financial reporting. This conversion results in lower sales when the dollar is strong.
However, there may be some good news in the near future. The Fed seems likely to raise interest rates less in the future. Some economists are predicting that a rate cut could occur in the second half of 2023.
This could mean that the U.S. dollar will weaken somewhat later this year. If so, Johnson & Johnson's sales and profits could be higher than expected.
- Upcoming spinoff
In 2022, Johnson & Johnson's total sales were up 6.2% on an adjusted operating basis (which excludes the impact of currency translation, acquisitions and divestitures). The company's pharmaceuticals segment grew slightly faster, at 6.8%. The medical technology division grew slightly slower at 6.1%.
Then came the consumer health segment. Adjusted operating sales in this segment grew 3.9%, well below the performance of J&J's other two major divisions. Obviously, consumer health is holding back the company's overall growth.
But Johnson & Johnson plans to spin off its consumer health division later this year. Many analysts are calling this a "once-in-a-decade buying opportunity for J&J stock."
Regardless of how you characterize it, spinning off J&J's consumer health business is a good move. Johnson & Johnson will become a better, faster-growing company, focusing only on pharmaceuticals and medical technology, and this separation could be a good catalyst for J&J stock.
Is it safe to say that Johnson & Johnson stock will rise after a poor start to 2023? No. Still, an unanticipated factor is the state of the global economy. A severe recession would probably cause most stocks, including J&J, to fall.
But Johnson & Johnson will almost certainly fare better in a downturn than the general market. The company is a dividend king with a sustainable business model that has survived and thrived for a long time. In the past, investors have viewed J&J as a safe haven. That's unlikely to change if a recession hits this year.
Nevertheless, there is a chance that the recession will not come after all. The odds of Johnson & Johnson stock bouncing back after a weak start to this year should be much higher with a stronger economy. Either way, J&J is well-positioned to deliver above-market returns over the long term.
As long as the price is below 167.00, follow the recommendations below
- Time frame: D1
- Recommendation: short position
- Entry point: 161.93
- Take Profit 1: 159.00
- Take Profit 2: 150.00
Alternative scenario:
If the level of 167.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 167.00
- Take Profit 1: 170.00
- Take-profit 2: 175.00
