Johnson and Johnson Earnings: A Solid Third Quarter, and Orthopaedics Separation Makes Sense

Key Morningstar Metrics for Johnson & Johnson

• Fair Value Estimate: $172.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Johnson & Johnson’s Earnings

Johnson & Johnson JNJ reported third-quarter results slightly ahead of consensus, inching up full-year guidance for reported revenue growth by 30 basis points to 5.7% at the midpoint while maintaining earnings growth guidance. Management intends to separate its orthopedics business within two years.

Why it matters: J&J is navigating the patent cliff for immunology drug Stelara while also in a rapid growth phase for several newer products in medtech, and the ortho announcement should bring focus to this diversified healthcare giant.

• The announced separation of the lower-growth orthopedics business will create an instant, stand-alone leader in this market and allow J&J to focus on other portions of medtech—namely cardiovascular and surgery businesses—that have faster growth and higher margins.
• J&J’s innovative medicine segment grew 3.7% at constant currencies, excluding acquisitions and divestitures (like newly acquired neurology drug Caplyta), which is a strong result considering the 6.4 percentage point headwind on sales from Stelara (biosimilar competition).

The bottom line: We’re maintaining our fair value estimate for wide-moat J&J at $172 per share. Shares are trading at a roughly 10% premium to our fair value estimate. We attribute this to more aggressive consensus growth assumptions for the oncology and immunology portfolio, which faces competition.

• We’re particularly focused on potential growth for immunology drugs Tremfya and icotrokinra, which could have overlapping approvals and face competition from AbbVie’s Skyrizi and Rinvoq. A head-to-head study of Tremfya versus Skyrizi in Crohn’s disease could provide differentiation.
• While we continue to watch for updates on potential pharmaceutical tariffs, we think J&J is in a good position following Donald Trump administration deals with Pfizer and AstraZeneca. Most US-bound J&J products are already made in the US, and we expect complete coverage within five years.