After Earnings Beat, Wall Street Talks Johnson & Johnson Litigation Risk

Johnson & Johnson JNJ shares are down 2% since the company reported a second-quarter earnings beat on Tuesday morning.

Johnson & Johnson reported a 42% increase in net profit in the quarter. Revenue of $20.56 billion was down 1.3% from a year ago but also topped consensus analyst estimates of $20.29 billion. The company also reiterated its full-year earnings guidance and raised its sales forecast, but investors seem increasingly concerned about the potential negative impacts of opioid and talc litigation.

Several analysts have weighed in on Johnson & Johnson since the report. Here’s a sampling of what they had to say.

Near-Term Litigation Risk

Wells Fargo analyst Larry Biegelsen said the opioid overhang could be settled by the end of 2019, but talc litigation could drag on.

“The Daubert hearing in the talc case scheduled to start on 7/22 may give some sense of the strength of the case for the plaintiffs and defendant (JNJ) and thus offer some visibility on how many of these cases (85% of talc cases could be affected by the Daubert hearing) could move forward,” Biegelsen wrote in a note.

Bank of America analyst Bob Hopkins said results were slightly better than expected thanks to strong international pharma growth and less generic headwinds.

“Until we get more clarity on some of the litigation facing JNJ, we expect the stock to remain range-bound,” Hopkins wrote.

Underlying Value

Morgan Stanley analyst David Lewis said an acceleration in the pharma market heading into 2020 would typically be a bullish catalyst, but the stock performance is instead tied to legal risk for the time being.

“Our valuation analysis suggests the stock is discounting $35B in value but the path to clarity on talc/opioid is opaque,” Lewis wrote.

Raymond James analyst Jayson Bedford said there is still plenty of drama ahead for Johnson & Johnson investors in the near term, but the company has solid fundamentals and the stock has an attractive valuation.

“While acknowledging that the stock will continue to be volatile on the litigation headlines, we remain comfortable with our estimates, expect revenue growth to accelerate in 2020, and believe the valuation offers downside support,” Bedford wrote.

Ratings And Price Targets

• Morgan Stanley has an Equal-Weight rating and $145 target.
• Wells Fargo has an Outperform rating and $157 target.
• Raymond James has an Outperform rating and $146 target.
• Bank of America has a Neutral rating and $150 target.

The stock traded around $132.10 per share at time of publication.

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