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Johnson & Johnson is a True Value in a Rocky Market

Stock (Symbol)

Johnson & Johnson (JNJ)

Stock Price

$173

Sector
Healthcare
Data is as of
February 2, 2022
Expected to Report
April 19
Company Description
Johnson & Johnson is a holding company, which is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. It operates through three segments: Consumer, Pharmaceutical and Medical Devices. Its primary focus is products related to human health and well-being. The Consumer segment includes a range of products used in the baby care, oral care, skin care, over-the-counter pharmaceutical, women’s health and wound care markets. The Pharmaceutical segment is focused on five therapeutic areas, including immunology, infectious diseases, neuroscience, oncology, and cardiovascular and metabolic diseases. The Medical Devices segment includes a range of products used in the orthopedic, surgery, cardiovascular, diabetes care and vision care fields. Source: Thomson Financial
Sharek’s Take
David SharekJohnson & Johnson (JNJ) is spinning off its slow-growing division, and the result should be a faster growing J&J and perhaps a faster growing stock. In 2023, J&J is expected to spin off its Consumer Health division, which was the slowest growing division last qtr with just 1% sales growth year-over-year. Pharmaceuticals and Medical Devices, the company’s other two divisions, grew 17% and 4%, respectively. Overall, JNJ has been expected to grow profits around 7% per year. After the spinoff, the company might be able to grow profits 10% per year. And since profit growth is often similar to stock growth, I’m optimistic that JNJ stock might be able to grow 10% a year or so long-term once the slow-growing division is a separate entity.

Johnson & Johnson and its subsidiaries have approximately 134,500 employees worldwide engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The Company is organized into three business segments: Consumer Health, Pharmaceutical and Medical Devices. The Consumer Health segment offer products focused on personal healthcare used in the skin health/beauty, over-the-counter medicines, baby care, oral care, women’s health and wound care markets. The Pharmaceutical segment is focused on six therapeutic areas: Immunology, Infectious Diseases, Neuroscience, Oncology, Cardiovascular and Metabolism and Pulmonary Hypertension. Medicines in this segment are distributed directly to retailers, wholesalers, hospitals and health care professionals for prescription use. Finally, The Medical Devices segment includes a broad range of products used in the Interventional Solutions, Orthopaedics, Surgery, and Vision fields. These products are distributed to wholesalers, hospitals and retailers, and used predominantly in the professional fields by physicians, nurses, hospitals, eye care professionals and clinics. Here are more details on J&J’s divisions, including sales growth last qtr:

  • Pharmaceutical delivered 16% sales growth last qtr. Pharmaceutical was the largest division with 61% of total company revenue last qtr. Growth was driven by:
    – TREMFYA, for psoriasis treatment.
    – STELARA, for immune-mediated inflammatory diseases.
    – DARZALEX, for the treatment of multiple myeloma.
    – ERLEADA, for treatment of prostate cancer.
  • Medical Devices revenue increased by 4%. This division was 29% of company revenue. The Medical devices segment was negatively affected by new COVID-19 variants that have delayed recovery in medical and surgical procedures. Growth was driven by:
    – Interventional solutions, up 14%.
    – Advanced surgery, up 7%.
    – Vision, up 9%.
    – Vision Surgical, up 21%.
  • Consumer Health revenue increased 1%, last qtr. The Consumer division was 16% of total sales. Additional shipping days, as well as labor and raw material shortages, negatively affected the Consumer Health division and especially the Skin Health & Beauty business where sales decreased by around 7%, driven by external supply constraints, mainly in Neutrogena and OGX products. Growth was driven by:
    – TYLENOL and MOTRIN, for respiratory and digestive analgesics.
    – Over-the-counter medicines, for adult and pediatric fever in the U.S. and worldwide incidence of cough, cold, flu, and digestive health.

JNJ  is a stable stock that can provide a high level of safety in a portfolio, but this has been a slower-growing stock. The stock usually has an Est. LTG of just 6-7% per year. Right now, the growth rate is 7%. A dividend yield of ~3% pushes the estimated total return to above 10% a year. J&J’s credo has been “Businesses should make a solid profit” and outside of 2020, the company has delivered as profits have increased every year since 1984. Meaning 36 consecutive years of profit growth. The company has a AAA rating from S&P, has increased its dividend every year since 1963. JNJ is a core holding in the Conservative Growth Portfolio. With a reasonable P/E of 16, the stock is a true value in an uncertain stock market.

One Year Chart
JNJ is oh-so-close to breaking out. A close above $174 would be bullish.

The P/E is 16 this qtr. It was 18 last qtr. The stock’s a bargain here.

The Est. LTG of 7% is down, from 8% 2qtrsAgo and up from 9% 3qtrsAgo.  After the split, I’m optimistic that the JNJ side can grow 10% or so a year.

Earnings Table
Last qtr, Johnson & Johnson posted 15% profit growth and met expectations of 15% growth. Worldwide sales increased 11%. U.S. sales contributed 3% growth and International climbed 19%. Pharmaceutical business drove again the strongest sales growth, over last year.

Sales performance was fueled by strong pharmaceutical products like TREMFYA, ERLEADA, and DARZALEX, and strong e-commerce growth, as well as contributions from medical and consumer businesses, during the qtr.

Annual Profit Estimates were mixed this qtr. For fiscal 2022, management expects sales to grow around 7% to $100 billion.

Qtrly Profit Estimates are for 0%, 6%, 4%, and 17% profit growth the next 4 qtrs. Note the company has tough comparisons from the year-ago periods.

Fair Value
My Fair Value P/E comes down from 19 last qtr to 18 this qtr, I did that because we are in a Bear Market where P/E ratios have been reduced. Interest rates are expected to rise in 2022, which should result in lower valuations.

This stock has modest upside.

Bottom Line
Johnson & Johnson (JNJ) is stock with a high safety rating, a healthy dividend that’s increased 56 straight years, and great long-term track record of growing profits on an annual basis. This is a true Blue Chip stock that is a core holding for conservative accounts.
A split for the company should benefit the JNJ stock as that side will have the fastest growing divisions. My guess is after the split takes place I will sell the Consumer Health stock as it might not have the ability to deliver 10% total returns I look for in the Conservative Portfolio.JNJ drops from 20th to 30th in my Conservative Portfolio Power Rankings. This stock is still a slow grower for the next year. Qtrly profit estimates are poor, and the stock is around its highs in a Bear Market. JNJ might not have the institutional support to break out and run higher.
Power Rankings
Growth Stock Portfolio

N/A

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

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