Johnson & Johnson (JNJ)

Equity
US
Healthcare

RISK

RETURN

Key risk factors

Negligible price volatility

Strong & resilient to price shocks

Good trading liquidity

Key return factors

Very strong margins and returns

Solid dividends

Good growth

Company profileJohnson & Johnson, together with its subsidiaries, researches and develops, manufactures, and sells various products in the healthcare field worldwide. The company's Consumer Health segment offers baby care products under the JOHNSON'S and AVEENO Baby brands; oral care products under the LISTERINE brand; skin health/beauty products under the AVEENO, CLEAN & CLEAR, DR. CI:LABO, NEUTROGENA, and OGX brands; TYLENOL acetaminophen products; SUDAFED cold, flu, and allergy products; BENADRYL and ZYRTEC allergy products; MOTRIN IB ibuprofen products; NICORETTE smoking cessation products; and PEPCID acid reflux products. It also offers STAYFREE and CAREFREE sanitary pads; o.b. tampons; adhesive bandages under the BAND-AID brand; and first aid products under the NEOSPORIN brand. It serves general public, retail outlets, and distributors. The company's Pharmaceutical segment offers products for rheumatoid arthritis, psoriatic arthritis, inflammatory bowel disease, and psoriasis; HIV/AIDS and COVID-19 infectious diseases; mood disorders, neurodegenerative disorders, and schizophrenia; prostate cancer, hematologic malignancies, lung cancer, and bladder cancer; thrombosis, diabetes and macular degeneration; and pulmonary arterial hypertension. This segment serves retailers, wholesalers, distributors, hospitals, and healthcare professionals directly for prescription use. Its MedTech segment provides electrophysiology products to treat cardiovascular diseases; neurovascular care products to treat hemorrhagic and ischemic stroke; orthopaedics products in support of hips, knees, trauma, spine, sports, and other; advanced and general surgery solutions that focus on breast aesthetics, ear, nose, and throat procedures; and disposable contact lenses and ophthalmic products related to cataract and laser refractive surgery under the ACUVUE brand. This segment serves wholesalers, hospitals, and retailers. The company was founded in 1886 and is based in New Brunswick, New Jersey.

Valuation: Fairly valued

Multiple

TTM

NTM

P/E

9.20

16.00

PEG

7.20

P/B

5.10

3.80

P/S

3.90

4.00

P/FCF

18.90

18.30

EV/EBITDA

11.90

14.80

Based on key historical and expected multiples, the stock is fairly valued relative to its peers. In particular, the stock is undepriced on P/E, of fair value on EV/EBITDA, and trading at neutral levels on P/FCF.

Performance: Mixed

The stock has been falling steadily in the past six months, losing 3% in total. The stock has lagged its global peers from the same sector and industry (as shown above), underperforming then by 9ppts in total. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is neutral.

Analyst view: Somewhat favourable

The average target price is 178 and suggests 21% upside potential. Usually, this means a BUY recommendation among investment firms, or a recommendation to increase one's position in this instrument in the next 12 months. The most optimistic analyst has a target price of 215.0. This translates into 46% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 155.0. This suggests 5% upside potential. Even the most pessimistic analyst believes there will be stock growth.

Profitability: Very strong

RoE

Johnson & Johnson reported a return on equity (RoE) of 85.5% in the last 12 months, up from 84.1% in FY23. The market consensus projects an RoE of 111.6% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 35.0% in the last 12 months, an increase from 34.5% in FY23. The market analysts predict that RoA will be 47.4% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) grew to 48.6%, above the peers. The consensus estimate for FY24 for RoCE is 25.4%, again ahead of the peers.

Net margin

EBITDA margin

Historically, JNJ has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 69.5%, a growth from 68.3% in FY23. The company has reported good EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 32.5% in the last 12 months, up from 32.2% in FY23.

RoIC / WACC = 7.1(excellent value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 7.1 in the past several years. This ratio implies a excellent shareholder value creation.

Growth: Good

Revenue

EBITDA

EPS

Free cash flow

JNJ reported revenue of USD 89 648mn in the last 12 months, down 4% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS grew 11% from FY23 to USD 14.11. Market expects EPS to reach USD 10.65 in FY24.Revenue has been growing very slowly over the past several years (middle negative), while EBITDA growth has been weak. This all contributed to very fast EPS growth (strongly positive). The FCF trend is falling, a notch worse than EBITDA. We emphasize the highly volatile dynamics of EPS. On the positive side, revenue and FCF dynamics is very stable.

Dividends: Solid

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been good and slightly above its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Limited

The risk of default is minimal. We note robust profitability, solid return on capital, strong debt servicing capacity, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors and we point to slow historical revenue growth, and excessive margin volatility.

Volatility: Negligible

In normal market circumstances, JNJ is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, JNJ is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Low

JNJ boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.