To The Moon

$Centene(CNC)$

$Johnson & Johnson(JNJ)$

We think that Centene stock (NYSE: CNC) currently is a better pick compared to the pharmaceuticals bellwether Johnson & Johnson stock (NYSE: JNJ), given Centene’s CNC better prospects and comparatively lower valuation. CNC stock trades at a P/S ratio of 0.4x, compared to 4.0x ZRX for JNJ stock. This gap in valuation can be attributed to J&J’s superior profitability and a better debt position.

If we look at stock returns, Centene’s 20% growth is much better than the 5% rise for J&J over the last twelve months. This compares with a -4% change in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Centene is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that CNC stock will offer better returns than JNJ stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Johnson & Johnson vs. Centene: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Centene’s Revenue Growth Has Been Stronger In Recent Years

J&J’s sales grew 15% to $93.8 billion in 2021, compared to $81.6 billion in 2018, while Centene’s sales grew 2x to $126 billion in 2021, compared to $60.1 billion in 2018.

While J&J’s medical devices business faced headwinds in 2020 due to the pandemic’s impact, it rebounded in 2021.

The company’s pharmaceuticals business is seeing strong growth led by market share gains for its cancer drugs, Imbruvica and Darzalex, and immunology drugs, Stelara and Tremfya.

Centene saw its revenue expand sharply in 2020, primarily due to the acquisition of WellCare, as well as higher enrollments in the Medicaid business.

Late last year, Centene announced its plans for portfolio optimization. The company will review divesting its international operations to focus on its core business. It also said that it plans to increase share buybacks from 2022, aiding its stock price growth.

Our Johnson & Johnson Revenue and Centene Revenue dashboards provide more insight into the companies’ sales.

Looking forward, Centene’s revenue is expected to grow faster than J&J’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 16% for Centene, compared to a 5% CAGR for J&J, based on Trefis Machine Learning analysis.

Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. J&J Is More Profitable, And It Has A Better Debt Position

J&J’s operating margin of 16.7% over the last twelve months is much higher than 1.8% for Centene.

This compares with 24.1% and 2.3% figures seen in 2019, before the pandemic, respectively.

J&J’s operating income rose 13% to $23.6 billion in 2021, compared to $20.8 billion in 2018, while that of Centene declined 6% to $1.7 billion in 2021, compared to $1.8 billion in 2019.

J&J’s free cash flow margin of 20% is better than 3% for Centene.

Our Johnson & Johnson Operating Income and Centene Operating Income dashboards have more details.

Looking at financial risk, Centene’s 76% debt as a percentage of equity is much higher than 13% for J&J, while its 19% cash as a percentage of assets is slightly above the 17% for the latter, implying that J&J has a better debt position, while Centene has more cash cushion.

3. The Net of It All

We see that Centene has demonstrated better revenue growth, it has a better cash cushion, and it is trading at a comparatively lower valuation. J&J is more profitable and it has a better debt position.

Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Centene is currently the better choice of the two.

The table below summarizes our revenue and return expectations for J&J and Centene over the next three years and points to an expected return of 71% for Centene over this period vs. a 9% expected return for J&J, implying that investors are better off buying CNC over JNJ, based on Trefis Machine Learning analysis – Johnson & Johnson vs. Centene – which also provides more details on how we arrive at these numbers.

The numbers are very clear for a Centene (CNC) win, with 71% over 9% (JNJ's) in the Stock Return Forecast (3 Year) Projections (See above).