Yahoo Finance Why Johnson & Johnson Stock Is a Better Buy Than Pfizer
Pfizer Inc. (PFE) and Johnson & Johnson (JNJ) are two of the largest health care stocks and drugmakers in the world, each with a market capitalization north of $200 billion.
Both of their shares are up over the past year, both are trading in line with their peers around 16 times earnings and both pay a dividend around 3 percent. But dig a little deeper, and the differences in the companies become more apparent, prompting some investing experts at the moment to favor JNJ stock over PFE.
Johnson & Johnson is well-known for its consumer brands, while Pfizer is more often compared with purer-play drugmakers Merck & Co. (MRK) and Eli Lilly and Co. (LLY). While Johnson & Johnson gets around 40 percent of its revenue from pharmaceutical sales, roughly the same amount from medical devices and about 20 percent from consumer products, nearly all of Pfizer's sales are from branded and generic prescription pharmaceuticals, over-the-counter drugs and vaccines.
That diversification is one of JNJ's advantages over Pfizer, says David Katz, chief investment officer at New York-based Matrix Asset Advisors, which owns both names. "Some of their businesses are always working at some point," he says.
He also thinks Johnson & Johnson is a better-run company, noting it has grown its earnings per share -- an increase from $3.49 per share in 2011 to $5.70 last year. Pfizer's earnings per share have been relatively flat over that time.
JNJ stock is "very desirable" because it has steadier earnings predictability and a higher return-on-equity percentage over the last 10 years than Pfizer, says John Reese, founder of Connecticut-based Validea Capital Management.
It also has a more conservative financial strategy than many companies, with its long-term debt less than a combination of its cash and inventory, a sign of a healthy company, Reese notes.
Jeffrey Loo, health care analyst with S&P Capital IQ, thinks there is more potential in Johnson & Johnson's drug pipeline than Pfizer's. Johnson & Johnson has said it will have 10 new drug filings by 2019, each of which could reach blockbuster sales levels of $1 billion a year if approved by the U.S. Food and Drug Administration.
While Pfizer is still a large and successful company with a large drug pipeline, it has been dependent on Lipitor, which is now facing generic competition, Reese says.
Nevertheless, over time Reese expects Pfizer to turn things around with new drugs. "That's what you're rolling the dice on," he says. "Johnson & Johnson is a more stable bet."
Pfizer has been relying on acquisitions to fuel its drug pipeline, as it has not been as successful developing drugs internally, Loo says. Growing through mergers and acquisitions can be an expensive way to grow a company because of premiums that have to be paid to acquire another company.
Loo, who has a "buy" recommendation on JNJ stock but a "hold" recommendation for PFE, downgraded the latter after it bought generic and biotech-copy drug company Hospira for $15 billion, a "substantial premium for a company whose sales were declining."
An unknown for Pfizer is whether it acquires Allergan (AGN), which would be the biggest pharmaceutical acquisition in history. The companies in October said they are in talks. Such a move would have its advantages for Pfizer. Given higher taxes paid by U.S. companies, such a deal would allow Pfizer to lower its tax rates through a tax inversion, Loo says.
One wild card for Pfizer is whether it will spin off or sell its generics business, a move that would be positive for investors holding the stock now because margins for branded products are bigger and faster growing than those for generics, he says.
Katz expects Pfizer stock will be more dynamic than Johnson & Johnson over the next year, given the potential split-up or more mergers and acquisitions. But he prefers Johnson & Johnson over the longer term because of how the company has been managed so far.
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