Forget Johnson & Johnson: Another Healthcare Giant Is a Much Better Bet for Growth

Johnson & Johnson (NYSE:JNJ) is one of the top healthcare companies in the world. Last year, it spun off its consumer health business to focus on growing other parts of its operations, which include innovative medicines and medical devices. And over the years, the company expects growth of 5-7%.

But Johnson & Johnson still faces uncertainty around its talc lawsuits, which may put a strain on its cash flow. It's also facing a loss in exclusivity in one of its top-selling drugs, Stelara, in the near future. The company is facing multiple headwinds that could affect its ability to generate significant growth, despite its optimism.

Rather than investing in Johnson & Johnson, which is a bit of a risky investment given its ongoing legal battles, healthcare investors who are looking for growth have a more promising opportunity in Abbott Laboratories (NYSE:ABT).

Why Abbott Laboratories may be an underrated growth stock

Abbott Laboratories has a more diverse business than Johnson & Johnson, which means it has more ways to grow its operations. It generates revenue from multiple segments, including nutrition, diagnostics, established pharmaceuticals, and medical devices. During the first six months of the year, the company has grown its sales by more than 3% to $20.3 billion. Although its diagnostics business has stumbled, with its sales falling just under 12% (due to a decline in COVID-19 testing sales), other segments have performed well, with medical device revenue growing by slightly over 12%. In comparison, Johnson & Johnson has also generated similar 3% growth during the first half of the year, with its sales totaling $43.8 billion.

While Abbott Laboratories is growing at a comparable rate to Johnson & Johnson, I'm more bullish on its longer-term growth for a couple of reasons.

The first is that it's not as deeply entrenched in legal troubles. While Abbott Laboratories has been facing legal troubles, particularly with its baby formula products, they're not nearly as daunting as Johnson & Johnson's concerns, which involve tens of thousands of lawsuits. Costly legal bills can affect a company's cash flow and its ability to invest in its growth opportunities.

Second, Abbott Laboratories has been generating some impressive numbers in its medical device business, and there's much more room for that segment to grow at a high rate.

Medical device revenue accounted for 45% of Abbott Laboratories' top line during the first six months of the year (versus 36% for Johnson & Johnson), and it's the company's fastest-growing business unit. Abbott Laboratories is also a big name in diabetes care, with its FreeStyle Libre continuous glucose monitoring (CGM) devices being among the top sellers in the market. In the first half, the company's diabetes care products generated revenue totaling $3.2 billion, which rose at a rate of nearly 18% compared to the same period last year.

There could still be much more growth ahead. In June, the U.S. Food and Drug Administration granted clearance for two new CGMs, which won't require a prescription. Typically, CGMs are used by patients with diabetes and high glucose levels who take insulin. But the new Libre Rio system is for diabetics who don't require insulin injections, who want to manage their glucose levels. Lingo is another device for people who are simply looking to improve their health and wellness. It will provide users with personalized insights and coaching.

By expanding the reach of CGMs beyond just diabetics who require insulin, Abbott has the potential to accelerate its growth rate in medical devices and, in turn, hit better overall growth numbers in the future. Researchers at Mordor Intelligence estimate that the market for CGMs will nearly double from $11.6 billion in 2024 to $21.3 billion by 2029, with Abbott Laboratories being a key player.

Abbott Laboratories is the better option overall for growth investors

For growth investors looking to maximize their potential returns, Abbott Laboratories stock makes for a better buy than Johnson & Johnson. It's facing fewer risks ahead, and with a robust medical device business, particularly when it comes to diabetes care, it has the potential to outperform in the long run.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.