Pfizer Inc. (NYSE:PFE) shares are up more than 9.70% this year and recently decreased -0.14% or -$0.05 to settle at $35.58. Johnson & Johnson (NYSE:JNJ), on the other hand, is up 21.23% year to date as of 12/05/2017. It currently trades at $140.61 and has returned -0.25% during the past week.
Pfizer Inc. (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect PFE to grow earnings at a 5.95% annual rate over the next 5 years. Comparatively, JNJ is expected to grow at a 7.03% annual rate. All else equal, JNJ’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 33.77% for Johnson & Johnson (JNJ). PFE’s ROI is 7.80% while JNJ has a ROI of 17.00%. The interpretation is that JNJ’s business generates a higher return on investment than PFE’s.
The value of a stock is simply the present value of its future free cash flows. PFE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.42. Comparatively, JNJ’s free cash flow per share was +1.18. On a percent-of-sales basis, PFE’s free cash flow was 4.74% while JNJ converted 4.41% of its revenues into cash flow. This means that, for a given level of sales, PFE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. PFE has a current ratio of 1.40 compared to 1.30 for JNJ. This means that PFE can more easily cover its most immediate liabilities over the next twelve months. PFE’s debt-to-equity ratio is 0.72 versus a D/E of 0.48 for JNJ. PFE is therefore the more solvent of the two companies, and has lower financial risk.
PFE trades at a forward P/E of 12.96, a P/B of 3.49, and a P/S of 4.04, compared to a forward P/E of 17.78, a P/B of 5.07, and a P/S of 5.06 for JNJ. PFE is the cheaper of the two stocks on an earnings, book value and sales basis. 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. PFE is currently priced at a -6.71% to its one-year price target of 38.14. Comparatively, JNJ is -3.69% relative to its price target of 146.00. This suggests that PFE 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 2.50 for PFE and 2.40 for JNJ, which implies that analysts are more bullish on the outlook for PFE.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. PFE has a beta of 0.99 and JNJ’s beta is 0.81. JNJ’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. PFE has a short ratio of 3.37 compared to a short interest of 2.46 for JNJ. This implies that the market is currently less bearish on the outlook for JNJ.
Johnson & Johnson (NYSE:JNJ) beats Pfizer Inc. (NYSE:PFE) on a total of 8 of the 14 factors compared between the two stocks. JNJ has a higher cash conversion rate, is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. In terms of valuation, PFE is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, JNJ has better sentiment signals based on short interest.