Earnings

Dissecting the Numbers for Bristol-Myers Squibb Company (BMY) and Johnson & Johnson (JNJ)

Bristol-Myers Squibb Company (NYSE:BMY) shares are up more than 1.94% this year and recently increased 0.74% or $0.46 to settle at $62.47. Johnson & Johnson (NYSE:JNJ), on the other hand, is up 3.63% year to date as of 01/11/2018. It currently trades at $144.79 and has returned 3.02% during the past week.

Bristol-Myers Squibb Company (NYSE:BMY) and Johnson & Johnson (NYSE:JNJ) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect BMY to grow earnings at a 10.91% annual rate over the next 5 years. Comparatively, JNJ is expected to grow at a 7.07% annual rate. All else equal, BMY’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 33.77% for Johnson & Johnson (JNJ). BMY’s ROI is 19.80% while JNJ has a ROI of 17.00%. The interpretation is that BMY’s business generates a higher return on investment than JNJ’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. BMY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.49. Comparatively, JNJ’s free cash flow per share was +1.18. On a percent-of-sales basis, BMY’s free cash flow was 4.13% while JNJ converted 4.41% of its revenues into cash flow. This means that, for a given level of sales, JNJ is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. BMY has a current ratio of 1.60 compared to 1.30 for JNJ. This means that BMY can more easily cover its most immediate liabilities over the next twelve months. BMY’s debt-to-equity ratio is 0.57 versus a D/E of 0.48 for JNJ. BMY is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BMY trades at a forward P/E of 19.40, a P/B of 6.93, and a P/S of 4.98, compared to a forward P/E of 18.44, a P/B of 5.25, and a P/S of 5.19 for JNJ. BMY is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. BMY is currently priced at a -2.18% to its one-year price target of 63.86. Comparatively, JNJ is -1.74% relative to its price target of 147.36. This suggests that BMY is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for BMY and 2.50 for JNJ, which implies that analysts are more bullish on the outlook for JNJ.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. BMY has a beta of 1.11 and JNJ’s beta is 0.79. JNJ’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. BMY has a short ratio of 2.15 compared to a short interest of 2.89 for JNJ. This implies that the market is currently less bearish on the outlook for BMY.

Summary

Johnson & Johnson (NYSE:JNJ) beats Bristol-Myers Squibb Company (NYSE:BMY) on a total of 7 of the 14 factors compared between the two stocks. JNJ is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, JNJ is the cheaper of the two stocks on an earnings and book value, Finally, LLY has better sentiment signals based on short interest.

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