Johnson & Johnson (JNJ) is one of just two AAA-rated companies in the world, the other one being Microsoft (MSFT). Combine this with a widely diversified business, great management, and a long-standing dividend growth track record, and Johnson & Johnson is one of the highest-quality names in the world for investors to choose from.
JNJ operates in three main segments: pharmaceuticals, medtech, and consumer goods. None of those is cyclical, which is why JNJ has historically done well during recessions.
Moreover, two of these three business segments, namely pharmaceuticals and medtech, benefit from long-term growth tailwinds. An aging population in the U.S. and many important overseas markets requires more and more medical care, which is why healthcare expenditures as a percentage of GDP have been growing around the globe.
Driving factors for healthcare expenditures include rising living standards and demographic changes. Given that those factors are still at play, it seems likely that the overall healthcare industry will continue to see its share of global GDP rise. (See Johnson & Johnson stock charts on TipRanks)
Johnson & Johnson Catalysts
A diversified healthcare company like JNJ is poised to benefit from that trend, of course, but there are also company-specific growth factors at play.
First, JNJ owns a broad and deep pipeline in its pharmaceuticals segment, with promising late-stage candidates such as Tremfya to treat Crohn’s Disease, which is a market forecasted to grow to $14 billion by 2027. Tremfya is also being investigated for other indications, such as Ulcerative Colitis, which increases its potential peak sales.
Also, Balversa, one of JNJ’s oncology assets, is currently in late-stage studies for urothelial cancers, bladder cancers, etc. Since oncology is one of pharma’s largest and highest-growth segments, JNJ’s assets in this space, including Balversa, but also Darzalex, and many more, could lead to meaningful revenue growth from new drugs over the coming years.
Additionally, thanks to its strong balance sheet, JNJ can also easily grow inorganically whenever it finds suitable targets, such as Momenta, which it bought last year, or Actelion, which it bought for $30 billion in 2017.
Last but not least, JNJ has a history of reducing its share count regularly through share repurchases, which result in additional earnings-per-share growth, as company-wide net profits are distributed over a smaller number of shares.
Johnson & Johnson’s Financials
At the same time, however, it should be noted that for a company as large as JNJ, relative growth is generally not ultra-high. The law of large numbers dictates that growth rates, on a relative basis, have to slow down eventually as a company matures. Thus, investors shouldn’t expect growth rates from JNJ like those seen from a new biotech startup. Nevertheless, the analyst community is expecting a long-term growth rate of ~7%-8% from JNJ, which is not at all unattractive at the right valuation.
Today, JNJ trades for around $170, which pencils out to a 17-18x earnings multiple. This is not ultra-low, but for a company with JNJ’s quality, moat, and recession resilience, a high-teens earnings multiple doesn’t seem inappropriately high, either.
JNJ has had a median earnings multiple of around 21 over the last decade, thus shares are trading at a discount compared to how shares were valued in the past. To some degree that makes sense, as JNJ has become larger and growth has slowed down as the company has expanded. Still, JNJ could have some multiple expansion potential. If shares were to trade at 19x earnings a year from now, that would result in share price gains of around 10%, before any changes in its earnings per share.
Add in a dividend yield of ~2.5%, and JNJ looks like a very solid investment at current prices. This is not a get-rich-quick type of stock, but investors looking for a combination of growth, quality, and income at a reasonable valuation might enjoy JNJ at current valuations.
Wall Street Weighs In
According to TipRanks, JNJ stock has an analyst consensus rating of Strong Buy. Out of 8 analyst ratings, 7 rate it a Buy, and 1 analyst rates it a Hold.
As for price targets, the average Johnson & Johnson price target is $189.33 per share, implying around 10.16% in upside from today’s prices. Analyst price targets range from a low of $183 per share, to a high of $200 per share.
Disclosure: The author held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.