Is Johnson & Johnson (JNJ) A Good Stock To Buy? (2024)

Like every other investor, I endeavor to beat the market. To do so, I seek company's trading below fair value with reasonable to robust growth prospects. However, I also lean towards firms with growing dividend payouts, low risk profiles, and dominant market positions.

Johnson & Johnson (NYSE:JNJ) stock meets much of my criteria. JNJ is the largest pharmaceutical company on the globe and the third-largest drug company in the world. It is one of only two stocks with a AAA debt rating.

While the firm can boast of blockbuster drugs, it also holds a dominant position in orthopedics and a presence in the rapidly growing arena of digital robotic surgery. Its consumer sector provides investors with a slow growing but steady stream of revenue.

Switching costs for a number of the device products, patents and intellectual property intrinsic to the drug group, and to a lesser degree, a variety of brands in its consumer group, provide JNJ with concentric moats. Evidence of their efficacy is found in the pricing power that resulted in gross margins above 70% for the last four years and 35 consecutive year of adjusted operating earnings growth,

The company's R&D efforts are increasing, a COVID-19 vaccination is in the works, and promising drugs are in the pipeline.

However, the company experienced COVID related headwinds and is the target of lawsuits from several corners. Despite posting an 8.3% increase in revenue for FY 2020, net income dropped 2.7% due in part to $5.1 in litigation expenses. Furthermore, the size of the business means robust growth is unlikely.

Recent Results

Late last month, Q4 results reported revenue of approximately $22.48 billion, an 8% increase YoY, while non-GAAP (adjusted) net income fell by 1% to roughly $4.97 billion, or $1.86 per share.

Both metrics were still good enough to top the average analyst estimates of $21.67 billion for revenue and $1.82 for per-share adjusted net profit.

Pharmaceutical was the big winner with a 16.3% increase in revenue. However, adjusting for acquisitions and divestitures would have had organic growth at 8.4% for that segment.

The consumer health segment posted a 1.4% gain while revenue for medical devices fell by 0.7%. Overall, revenues grew 8.3%.

Management's EPS guidance for FY2021 of $9.40 to $9.60 is well above analysts' consensus of $9.00. The same is true of management's revenue forecast of $90.5 billion to $91.7 billion versus analysts' consensus of $88.58 billion.

Source: Q4 Earnings Call Presentation

As previously noted, litigation expenses muted results.

COVID 19 Impact And Vaccination Prospects

During the Q4 earnings call, management reported a full year decrease in EPS of 7.5%, largely attributed to COVID related headwinds. Pandemic restrictions had a significant impact on elective procedures, undermining sales in the medical devices segment. This resulted in a related decline in revenue of 6% outside the US. Global orthopedics took a 5.3% hit YoY, and overall device sales fell 2%. Sales of over-the-counter medications dropped 1.5%.

However, recent news on the company's vaccine efforts should provide hope for investors. Late last month, JNJ released the results of trials on its COVID-19 vaccine.

Based on 43,783 participants on three continents, the vaccine's overall efficacy was 66% in blocking moderate to severe COVID-19 and 85% effective in preventing severe forms of the disease.

Within 28 days of administration, the vaccine provided complete protection from hospitalization and death from COVID-19. With no significant safety concerns, the vaccine was well-tolerated by study participants.

Detractors will point to the lower efficacy rate of JNJ's vaccine versus that of Moderna (MRNA) and Pfizer (PFE) (94.1% and 95%, respectively). However, JNJ's studies occurred after a wider variety of COVID variants had surfaced. There is also some concern regarding the efficacy of Moderna's and Pfizer's vaccines on new strains of the coronavirus.

Furthermore, the JNJ vaccine has several advantages over that of competitors. The cost per dose is $10, while Pfizer's cost is $19.50 and Moderna's is $32. Note that the Pfizer and Moderna vaccines both require two shots, whereas the Johnson & Johnson vaccine is a one shot regimen. Pfizer's vaccine requires storage in ultracold temperatures while JNJ's can be stored in a standard refrigerator for three months. In fact, the loss of both Pfizer's and Moderna's vaccines due to faulty storage is commonplace.

Another investor concern is that the JNJ vaccine is "not for profit." However, that status does not continue in perpetuity. AstraZeneca (AZN) has a clause in its agreement that allows the company to sell the vaccines for profit beginning July 1, 2021. Johnson & Johnson may follow suit, but the worst case scenario is that the company can increase vaccine prices once the pandemic subsides.

A variety of sources, from WebMD to governmental agencies are predicting COVID-19 vaccinations will become an annual ritual, not unlike flu shots. If so, that means the JNJ vaccine may result in a recurring revenue boost.

Ronny Gal, analyst at Bernstein, estimates J&J will garner $3 billion in sales from its vaccine in 2021, and predicts the market for COVID vaccinations will be worth $20 billion in 2021. Morgan Stanley (MS) and Credit Suisse analysts estimate the annual market size for COVID-19 vaccinations in developed nations alone to be $10 billion or more.

The company will file for an emergency use authorization early this month.

The bottom line is this development will likely lead to a new product providing billions in revenue. However, for a company the size of Johnson & Johnson, the profits likely to be realized are not so great that this is a game changer.

Profit Makers And The Pipeline

JNJ ranks fourth among companies in prescription drug sales. EvaluatePharma forecasts a 2.8% CAGR for the company's drug sales from 2018 through 2024.

The firm's two biggest blockbusters are Imbruvica and Stelara. Sales for Imbruvica are expected to more than double from 2018 through 2024, climbing from $4.45 billion to over $9.51 billion. Stelara revenue should grow from nearly $5.3 billion to nearly $7.8 billion in that same time frame.

The company's oncology portfolio saw robust growth, up nearly 24% in Q4, with Darzalex leading the way, registering 49% gains. The following key products, Simponi, Stelara, Tremfya, Edurant, Opsumit, Uptravi and Invokana/Invokamet all registered double digit sales gains in Q4. Remicade (-12.9%) and Zytiga (-8.3%) were the only losers in the quarter.

The company has a healthy pipeline, with over two dozen ongoing phase 3 clinical trials.

However, what sets Johnson & Johnson apart from many of its rivals are the company's wide array of product offerings. While the pharma segment provides approximately 50% of sales, the medical device group contributes 30% of sales and the consumer products segment tallies a bit under 20%.

Source: Q4 Earnings Presentation

In 2015, JNJ joined with Ethicon and Google's former life sciences division, Verily, to form Verb Surgical, a medical robotics business. In 2019, the company acquired Auris Health, adding to the company's surgical robotics business.

This is an area that could lead to robust revenue as robotics currently account for only 2% of worldwide procedures. ResearchAndMarkets.com forecasts the global surgical robotics market will grow at a 21% CAGR, reaching $13.3 billion in sales by 2026.

JNJ Stock Dividend History

The allure of Johnson & Johnson for many investors is the reliable dividend growth the company provides. The mammoth size of the firm means growth in the share price is muted; however, one need only study the chart below to appreciate the effect the dividend has on long term gains.

Source

JNJ has a current yield of around 2.5%. The dividend's 3, 5 and 10 year growth rate is 6.2%, 6.2% and 6.6%, respectively. The dividend coverage ratio is a bit over 160%.

Lest you think JNJ's slow, steady growth leads to poor returns, peruse the next chart.

Source

Is JNJ A Good Stock To Buy?

JNJ's diverse businesses provide concentric moats in the form of switching costs, intellectual property and the strong products offered by its consumer group. With a AAA debt rating, the company is the model for those seeking a stock with a fortress financial foundation.

While the pandemic provided significant headwinds, pent up demand for elective procedures and the firm's vaccine should result in increased revenue for the short to mid term. Johnson & Johnson's robotics division could provide a growth spurt in the future.

The dividend is safe, and the company's competitive position is arguably unequaled overall. The primary consideration at this juncture is JNJ's stock valuation.

As I type these words, JNJ trades for $160.52 per share. The average 12 month price target of 15 analysts is $178.93. The price target of the 8 analysts rating the stock since the last quarterly report is $190.37.

The current PE is 29.86 and the forward PE is 15.27.

Seeking Alpha's Factor Grades rates JNJ's valuation as a B. My valuation system rates the company as a D+. While I'm a bit taken aback by the difference in valuation scores, I've learned through years of experience that I am best pulling back on the reins when either system provides a score below B- for most stocks.

Consequently, I rate JNJ as a HOLD.

While I am eager to invest in the company, I prefer a better margin of safety in the valuation. I would be an eager investor in JNJ if the shares dropped roughly 10% to 15%.

One Last Word

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