Analysts, Investors Like Johnson & Johnson's Improvement, But Lawsuits Loom

Johnson & Johnson JNJ stock was on the rise Wednesday following better-than-expected third-quarter earnings and guidance, but analysts are mostly leery of boosting recommendations in light of a string of legal challenges the company faces.

The Analysts

Morgan Stanley’s David Lewis maintained an Equal-weight rating on the stock with a $145 price target.

Bank of America Merrill Lynch's Bob Hopkins reiterated a Neutral rating and $150 price objective. 

Wells Fargo’s Larry Biegelsen maintained an Outperform rating with a $157 price target.

Raymond James analyst Jayson Bedford maintained an Outperform rating on the stock and raised the target price from $145 to $147.

The Takeaways

Company officials acknowledged on the Tuesday earnings call that it faces pressure from a number of lawsuits, with CFO Joseph Wolk saying the company is a target for litigation because of its prominence.

The company is embroiled in several lawsuits, but three are particularly high-profile: one involving its role in the opioid prescribing epidemic, one involving baby powder and a Pennsylvania case involving anti-psychotic drug Risperdal, in which J&J was hit last week with $8 billion in punitive damages — a verdict it's appealing. 

Possible Opioid Settlement

After the close Wednesday, Wall Street Journal reported that Johnson & Johnson is among several drug companies in talks with state and local governments about settling opioid cases by creating a settlement fund worth billions of dollars to handle claims in the cases.

J&J’s higher guidance shows its 2020 profile could see improvement across all segments, though with more muted EPS growth, Morgan Stanley's Lewis said in a Wednesday note. But the litigation overhang remains an impediment.

“Although the company has executed thus far in 2019, shares have underperformed the S&P by 17 points as opioid/talc (and more recently Risperdal) litigation balance the risk/reward profile,” the analyst said. 

BofA's Hopkins said upside may be limited for J&J until there is more clarity on opioid and other litigation. 

The legal issues are overshadowing otherwise good performance, several analysts said.

Raymond James' Bedford remained the most bullish on the company despite the courtroom drama.

“While we acknowledge that the litigation headlines will continue to weigh on the multiple, the business is performing better than expected and revenue growth accelerated in 3Q,” the analyst said in a Tuesday note.

"J&J has now raised its organic growth assumptions for the third straight quarter and revenue growth will likely accelerate in 2020."

Biegelsen, who covers the medical device sector, also noted the company's strong organic growth — its highest quarter in that regard since the fourth quarter of 2016.

Price Action

Investors seemed unconcerned about lawsuits, and possibly buoyed by the prospect of a known-amount fund to settle the opioid cases, sending the stock higher Wednesday. J&J shares were up 1.73% at $135.14 at the time of publication. 

Related Links:

Johnson & Johnson Trades Higher On Q3 Beat-And-Raise, Despite Legal Entanglements

Johnson & Johnson Hit With $8B Verdict In Risperdal Lawsuit

Photo by Mike Mozart via Flickr.