Johnson and Johnson (JNJ) Stock Analysis
I would assume most people have heard of Johnson and Johnson, but if not you most likely have used some of their products without even realizing it.
Ever have a headache and taken Tylenol? Ever needed to freshen up and swashed around some Listerine? Accidentally scratched up your knee while hiking and used a band-aid?
If yes, then you were a customer of this massive healthcare company. And while you may know their consumer health products, they are much more than that.
The company researches and develops, manufactures, and sells a range of products in the health care field worldwide. It operates through three segments: Consumer Health, Pharmaceutical, and Medical Devices.
As you can see a larger % of revenues comes from their pharmaceutical/device sales.
Overall the company has been around for a while (found in 1886) and is still finding way to continue to grow at a larger scale and across the world. It’s important to note that their sales are around 51% US and 49% international.
I would classify the stock as a mega cap stalwart. Meaning that they are already a massive company with a market cap of $439 billion dollars, but still have decent growth in EPS going forward while growing their dividend.
And they have a P/E ratio of 25 and a beta of 0.70, the market is labeling them in a similar fashion.
The company is part of an elite group known as the dividend aristocrats and actually sits as one of the longest dividend growth streak with 59 years! The ability to grow the company while also continuously growing their dividend is a testament to the management team over all these years.
Year over year growth in the dividend was around 5% and the company has increased around 5-7% over the past 10 years. That can compound quickly over a longer period of time.
I don’t think healthcare is going out of style anytime soon. It is one of those industries that will be around forever.
As for growth rates across the three segments of JNJ’s business?
Consumer Health: 7.2% CAGR through 2026 (marketdataforecast.com)
Pharmaceuticals: 8% CAGR through 2025 (globalnewswire.com)
Medical Devices: 5% CAGR through 2026 (globalnewswire.com)
So pretty similar growth rates across the board. Not exactly robust growth, but better than a flat line or declining growth. With JNJ as a big market player, they should benefit from the global demand for their products to continue to expand into the foreseeable future.
This company is healthy when it comes to their financials.
From a debt perspective they hold around $33 billion, but with $25 billion in cash and generation of free cash flow it isn’t too much of a concern for me.
This investment really comes down to looking at the discounted cash flows for the current state of the business with steady projected earnings per share growth over the next 5 years and seeing that this stalwart is undervalued. This isn’t a massive growth play, it’s not an asset play, it’s a play on slow and steady growth in a stable healthcare company.
The company has a Return on Equity of 26.81%, operating margins of 26%, PEG ratio of 1.67 (under 2 ) and a nice dividend to boot of 2.6% (while the payout ratio is sustainable at 61%). It’s a cash machine type of business.
Building into my model, I used the guidance provided as a end point for 2021. We see Expected Full Year Vaccine Sales of ~$2.5B in their Q2 earnings report.
The biggest assumption I used was that operating margin would improve around 0.5% each year and be around 28% by 2025 (which I think is very reasonable when factoring in that they have reached those levels in prior years).
Growth built into their revenues is pretty low each year based on the large scale of the business already and factoring in the larger bump from the vaccines.
See attached model for all details
I see the company as undervalued around 20% and therefore worthy of getting into a position for this healthcare stalwart.
Recently the stock has pulled back after a huge run up to $180 from June to late August. It has been a rough few weeks for investors that got in on the later part of that run, but we have to remember we are thinking long term. Technicals here is usually to get a better entry point and we have recently touched the 200 DMA, RSI fell below 30, and it looks like we bounced with a curling MACD that is heading towards a bullish breakout.
In my eyes it shows that at these levels there is more support for the stock and has much less downside risk.
Risks & Ops
The vaccines provided a bump in revenues for the company and while that is great for the shareholders in the short term, the question becomes whether or not that it will last for the long-term through vaccines/booster shots going forward.
I am on the side that thinks Covid is probably not going away anytime soon and something that as a society we will continue to deal with for the next few years through new variants. I don’t think we will go through shutdowns or anything of that nature, but I do believe boosters and new vaccines will probably continue to be rolled out to make sure that we can avoid what we dealt with back in 2020.
Overall JNJ is not the type of stock to double in a year, but it is a solid business that is generating a ton of cashflow while maintaining a reasonable amount of growth going forward. It should add stability into the portfolio while still providing in my opinion a higher than average market returns at the current valuation.