Johnson & Johnson May Add Significantly To The Fortunes Of Shareholders

| About: Johnson & (JNJ)

Introduction

Johnson & Johnson (NYSE:JNJ) will break out of its 7-year trading range in 2013 because of continued growth in its drug division. Johnson & Johnson may add $50 billion dollars to its market capitalization in 2013.

Qualitative Analysis

Source: Information pertaining to Johnson & Johnson came from the shareholder annual report

Johnson & Johnson is a diversified company that operates in three segments: pharmaceutical, medical devices/diagnostics, and consumer.

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Its pharmaceutical segment grew by 8% between 2010 and 2011, and was the fastest growing division in Johnson & Johnson. JNJ's focus on developing and marketing drugs has been its growth strategy these past 5 years.

Click to enlarge The pharmaceutical division has grown by 8.8% with its fastest growing products being Prezista (41.3% growth), Remicade (19.1% growth), and Velcade (18% growth).

The company received regulatory approval for a variety of drugs through 2011 (which is the long-term growth catalyst behind the company).

  • XARELTO (rivaroxaban) an anti-coagulant developed with Bayer HealthCare, the first of its kind to prevent deep vein thrombosis (DVT). Also reduces the risk of stroke and systemic embolism in patients with non-valvular atrial fibrulation. The product was approved in the United States.
  • EDURANT (rilpivirine) is a drug for the treatment of HIV; drug was approved in both the United States and the European Union. HIV is a common sexual transmitted disease.
  • INCIVO (telaprevir), a product developed for the treatment of the Hepatitis C virus; product was approved in the European Union. Hepatitis C is a common virus in the United States.
  • ZYTIGA (abiraterone acetate), product developed for the treatment of metastic castration-resistant prostate cancer (prostate cancer is common in males). The product was approved in the United States and Europe.

These drugs are likely to grow Johnson & Johnson's presence in the Pharmaceutical space going forward, which keeps me optimistic on the growth prospects of Johnson & Johnson in 2013.

Click to enlargeJohnson & Johnson's international growth initiative continues to unfold, and is its fastest growing locational demographic, the segment grew by 11.2% compounded over the 10-year period.

Johnson & Johnson competes with: Merck & Company (NYSE:MRK), Proctor and Gamble (NYSE:PG), Pfizer (NYSE:PFE), Novartis (NYSE:NVS), GlaxoSmithKline (NYSE:GSK), Colgate-Palmolive (NYSE:CL), Sanofi (NYSE:SNY), Abbott Laboratories (NYSE:ABT), Novo Nordisk (NYSE:NVO), Amgen (NASDAQ:AMGN), among many others.

Technical Analysis

Over the past 7 years the stock was unable to consistently trade above $70 per share, but going into 2013 I find it highly plausible that the stock may be able to break above that level.

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Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50- , and 200- Day Moving Average. The 20-Day Moving Average crossed above the 50-Day Moving average on the monthly chart which further supports the conclusion that the stock may be in the beginning stages of a long-term run. The stock broke above the descending triangle formation which usually implies a strong move in the direction the triangle formation is broken. In this case, the stock is likely to trend higher going into 2013.

The recent drop in stock price had more to do with the fiscal cliff and less to do with the actual fundamentals of the stock. The stock is likely to trend higher and is in a multi-year up-trend. Therefore I remain optimistic going into 2013.

Notable support is $51.00, $57.00, and $63.00 per share.

Notable resistance is $72.00, $75.00, and $85.00 per share.

Street Assessment

Analysts on a consensus basis have very reasonable expectations for the company going forward.

Growth Est

JNJ

Industry

Sector

S&P 500

Current Qtr.

3.50%

116.40%

N/A

9.40%

Next Qtr.

0.70%

N/A

N/A

15.00%

This Year

1.80%

4.20%

12.00%

7.10%

Next Year

7.90%

47.20%

5.60%

13.10%

Past 5 Years (per annum)

4.02%

N/A

N/A

N/A

Next 5 Years (per annum)

6.12%

12.08%

13.89%

9.10%

Price/Earnings (avg. for comparison categories)

13.77

3.79

3.94

12.49

PEG Ratio (avg. for comparison categories)

2.25

0.87

2.18

1.34

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Source: Table and data from Yahoo Finance

Analysts on a consensus basis have a 5-year average growth rate forecast of 6.12% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

1.09

1.35

1.29

1.21

EPS Actual

1.13

1.37

1.3

1.25

Difference

0.04

0.02

0.01

0.04

Surprise %

3.70%

1.50%

0.80%

3.30%

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Source: Table and data from Yahoo Finance

The average surprise percentage is 2.3% above analyst forecasted earnings over the past four quarters (based on the above table). Analysts have been extremely accurate at forecasting earnings for the company.

Forecast and History

Year

Basic EPS

P/E Multiple

2003

$ 2.42

22.86

2004

$ 2.87

22.10

2005

$ 3.38

18.61

2006

$ 3.76

16.39

2007

$ 3.67

18.09

2008

$ 4.62

14.27

2009

$ 4.45

13.63

2010

$ 4.85

13.34

2011

$ 3.54

17.47

2012

$ 5.09

13.65

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Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

The EPS figure shows that throughout the 2003-2012 period, the company was able to grow earnings. The drop in earnings in 2011 was due to higher expenses, restructuring, and R&D costs. The effect has been temporary as the company strongly recovered in 2012.

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Source: Table created by Alex Cho, data from shareholder annual report

So as long as favorable economic conditions continue, product releases succeed, and core businesses are strongly managed, the company will generate reasonable returns over a 5-year time span based on the forecast below.

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Source: Forecast and table by Alex Cho

By 2018 I anticipate the company to generate $6.91 in earnings per share. This is because of earnings growth, improving global outlook, and earnings management.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

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Source: Forecast and chart by Alex Cho

Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.

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Source: Forecast and chart created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

Investment Strategy

JNJ currently trades at $69.48. I have a price forecast of $86.73 for December 31st 2013. The stock is below value, and I anticipate a price recovery during 2013.

Short Term

Over the next twelve months, the stock is likely to appreciate from $69.48 to $86.73 per share. This implies 25% upside from current levels. The technical analysis indicates a strong up-trend. While the previously mentioned price forecast using fundamental analysis further supports the assessment.

Investors should buy JNJ at $69.48 and sell at $86.73 in order to pocket short-term gains of 25% in 2013. Including dividends, the stock will generate a total yield of 28.5%.

Long Term

The company is a great investment for the long-term. I anticipate JNJ to deliver upon the price and earnings forecast despite the risk factors (missing analyst expectations). JNJ's primary upside catalyst is international expansion, product development, and earnings management. I anticipate the company to deliver upon my forecasted price target of $117.72 by 2018. This implies a return of 69% by 2018. When factoring back in the dividends (based on the table below) the company will generate a combined return of 97%. This rate of return comes with low-risk (5-year beta of 0.5).

Year

Dividend Yield @ $69.48 per share

Cumulative Total

2012

3.51

3.51

2013

3.83

3.83

2014

4.18

8.01

2015

4.56

12.57

2016

4.97

17.54

2017

5.43

22.96

2018

5.92

28.88

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Source: Forecast and table by Alex Cho, dividend data from shareholder annual report

A higher yielding investment opportunity albeit having higher risk is to buy the Jan 17, 2015 call option at the $70.00 strike. The call premium is $4.37. The price forecast for the end of 2014 is $92.20. The rate of return if the calls expire at $92.20 is 408%, the option will break-even when the stock trades at $74.37.

JNJ has a market capitalization of $192.5 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.

Conclusion

Johnson & Johnson is a great investment, and will out-perform the Dow Component going into 2013.

The conclusion remains simple: buy Johnson & Johnson on long-term growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.