Johnson & Johnson (JNJ – Free Value Line Research Report for Johnson & Johnson) has been making headlines for all the wrong reasons for quite some time. It looks like the company has suffered manufacturing issue after manufacturing issue without a clear resolution. For an enterprise as trusted as Johnson & Johnson, this is a rare black eye. For a company such as this in the medical space, one too many punches to the face could lead to unwanted lingering effects.
So far, the recent media troubles appear to have only led to a laggard stock performance, which is clearly visible on the Graph found on the Value Line Research Report. It is also evident in the trailing total return figures presented to the right of the Graph. Johnson & Johnson stock has underperformed the average of all the stocks covered by Value Line over the trailing one, three, and five years. The trailing three-year period was particularly weak, with a return on JNJ stock of just 4.6% compared to the broader group’s 42.7% cumulative gain.
With a string of bad publicity and a stagnant share price, are Johnson & Johnson shares worth consideration? The answer is a resounding yes.
The company is one of the largest healthcare providers in the world, with large businesses in pharmaceuticals, medical devices, and consumer products (one of the many facts pointed out in the Business Description). Although there have been missteps of late, the company is generally known for its operational excellence. Having ably handled a similar product-related fiasco involving tainted pills some time ago, the company has been quick to take action this time around. Moreover, the stagnant price is also partly an issue of the overall concern in the pharmaceuticals industry about patent expirations.
The breadth of the company’s product portfolio has allowed it to weather the current recall storm in stride, posting solid earnings throughout. The only recent misstep, if it can be called that, was a penny drop in earnings between 2008 and 2009. This can be seen in the historical portion of the Statistical Array. Looking up to the Graph again, however, reveals that this one-cent drop coincided with the most recent recession, shown by the shaded bar. That’s actually not a bad performance considering the time period and when compared to other companies.
Moreover, Johnson & Johnson is a financially strong company. For starters, it earns Value Line’s top rating for Financial Strength of A++, found in the Rating box. This, coupled with a Stock Price Stability score of 100 (the best possible), leads to a top-notch Safety Rank of 1. This can be found in the Ranks box.
Adding support to these proprietary Value Line measures is a low debt load, at just 13% of the company’s capital structure, and a large cash balance. In fact, the company’s $29.7 billion in cash more than covers its $18.7 billion in debt. These figures can be found in the Current Position and Capital Structure boxes, which are next to each other on the left side of the report. The current ratio, meanwhile, is a healthy 2.5. Current ratio is a measure of a company’s ability to pay all of its near-term costs and is calculated by dividing current assets by current liabilities, which can both be found in the Current Position box.
Value Line’s projections, meanwhile, suggest that growth will slow somewhat, but still remain solid. For example, Erik Antonson, the covering analyst, projects three- to five-year earnings per share of $6.20 on sales per share of $28.35. This information is in the Statistical Array. Looking at the Annual Rates box shows that these figures translate to annualized growth of 6% for earnings and 5% for sales. That’s not bad for such a large company, but surely nothing to write home about. It also is slower than the same figures over the trailing five- and 10-year periods.
That said, because the current share price is somewhat depressed, those same three- to five-year projections suggest a share price range of $85 to $100. (This is found in the Projections box.) That’s an advance of between 30% and 55% over recent price levels. Add in the company’s solid dividend, which has grown consistently over the years, and annualized total returns over the three- to five-year pull comes in at 10% on the low end and 15% on the high end. These are solid numbers for a conservative company with a $177 billion market capitalization.
Although waiting for better times can be hard, the Johnson & Johnson’s diversity and financial strength make clear why Antonson starts his concluding paragraph in the Analyst Commentary section by saying “This blue chip remains an excellent buy-and-hold candidate…”
At the time of this article's writing, the author did not have positions in any of the companies mentioned.