In the past month, Boeing is down 12%, while JNJ has lost 2%. Over the last three months, Boeing has fallen 10% and JNJ is up 0.3%.
But for a variety of reasons, it’s clear that JNJ is in huge trouble, while Boeing stock is poised to bounce back. Therefore, I recommend a pair trade of shorting JNJ stock and buying BA stock.
Johnson & Johnson’s Losses Will Be Truly Huge
J&J is fighting two gigantic and tremendously costly litigation battles, with thousands of plaintiffs in each of the conflicts. Those two battles are over the company’s role in the opioid epidemic and the allegations that its talcum powder contains cancer-causing asbestos.
Both struggles are looking like they will meaningfully hurt JNJ stock in the long-run. On Oct. 21, four state attorneys general, representing states, cities, and counties were willing to accept a settlement. Under the proposed settlement, J&J and four other companies would have paid over $22 billion of cash and provided $26 billion of “treatment drugs and delivery services” over ten years.
That, by itself, sounds like a deal that wouldn’t hurt JNJ stock too much. Under a similar, previous proposal that was later vetoed by municipalities, JNJ had to pay $4 billion over two to three years. That sounds doable for JNJ, which has $15 billion of cash, according to Yahoo Finance.
But not surprisingly, local governments, which have to shoulder most of the direct costs of the opioid epidemic, rejected the latest proposal as well.
The Statistics Don’t Look Good for JNJ Stock
It’s not surprising that municipalities rejected the latest proposed settlement because the money they would have received from it won’t come close to covering their costs. New York City has spent $500 million on the opioid epidemic, but would only receive $5 million or $6 million per year from the proposed settlement, the cities’ lawyer stated.
According to the lawyer, other cities are facing similar discrepancies. Why should cities accept a settlement that doesn’t come close to covering their costs? They would be much better off taking the drug companies to court themselves.
I believe any settlement will have to cover municipalities’ past and present costs or at least come close to doing so. As a result, I think J&J will have to pay at least two or three times more than the amount previously accepted by the attorneys general. Two times more would be around $8 billion, or over 50% of Johnson & Johnson’s current cash.
Although I couldn’t find any evidence that individuals have sued Johnson &Johnson over its role in the opioid crisis, they may still do so.
The Talcum Powder Will Likely Get Worse
Many individuals, however, have sued the company over the talcum powder allegations. Specifically, Bloomberg reported that the company is facing over 15,000 lawsuits related to the allegations.
The amount of money that JNJ may owe over this issue is truly staggering. Last year, a jury in New Jersey (where J&J is based and laws are more favorable to drug makers than most other states awarded $117 million to a plaintiff who claimed he contracted mesothelioma from the company’s powder.
Let’s say the average plaintiff suing the company gets $50 million. Multiplying $50 million by 15,000 yields $750 billion. That’s more than double the current $342 billion market cap of JNJ stock.
And any hope that the company had of successfully claiming that its baby powder doesn’t have asbestos (an argument it’s adopted in trials) disappeared recently. That’s because the FDA earlier this month discovered asbestos in the company’s baby powder, forcing JNJ to recall 333,000 bottles of baby powder in the U.S.
After that, no sane judge or jury is going to believe that the company’s powder didn’t contain asbestos, greatly undermining J&J’s legal position and the outlook of J&J stock.
Coming just two weeks after the company’s CEO testified that its powder didn’t have asbestos, the recall will likely destroy the company’s credibility in the eyes of the FDA and of the public.
As a result, the sales of its consumer products and its efforts to get its new drugs approved will probably take a huge hit. I will never buy any J&J product again, and I’m sure many others feel the same way.
The Outlook of Boeing Stock Is Much Better
Boeing has lost an estimated $9.2 billion due to the problems of its 737 Maxx plane. But that’s manageable for Boeing, which still has $9.6 billion of cash. More importantly, a possible end to the problems is in sight, as it still says that it expects the troubled plane to resume flying at the end of this year.
The Maxx plane crashes killed hundreds of people, eight of whom were Americans. It’s credibly alleged that J&J’s talcum powder killed tens of thousands of Americans. The opioid epidemic, in which it played a role, has killed hundreds of thousands of Americans.
J&J allegedly concealed the fact that asbestos was in its baby powder, and appears to have lied about that fact in court. Boeing was accused of covering up the 737 MAX’s problems. But it turns out that the company discovered problems with a flight simulator, not with the plane itself. And once the government approves the MAX after extensive testing, most travelers will probably not think twice about flying on it.
Finally, it would be quite easy for other companies, like Procter & Gamble (NYSE:PG), to start selling the consumer products in which J&J specializes. Moreover, unless JNJ develops a drug that prevents or cures a major disease like cancer or diabetes, the FDA doesn’t have to approve its drugs. Finally, if J&J goes bankrupt, most of its employees will quickly be hired by other drug companies.
By contrast, it’s very hard to make quality planes. In fact, Boeing has only one viable competitor in the world, Airbus (OTC:EADSY). The latter company probably doesn’t have the ability to meet the world’s demand for aircraft. and if Boeing disappears, Airbus’ prices would go through the roof. Finally, if Boeing goes belly up, most of its workers would likely be unemployed because no other U.S. company makes large civilian airplanes. In other words, JNJ is quite expandable, while Boeing is not.
The Bottom Line on JNJ Stock and Boeing Stock
Johnson & Johnson’s legal liabilities look unaffordable, while Boeing looks poised to bounce back from its problems soon. Moreover, JNJ can be replaced much more easily than Boeing can. But the market appears to be taking a completely different, inaccurate position. Therefore, investors should short JNJ stock and buy BA stock.
As of this writing, the author did not have a position in any of the aforementioned securities.