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Since reaching its 52-week high in mid-May, the shares of Johnson & Johnson (NYSE:JNJ) have pulled back by about 6% to the current $84.46 level. While I believe the stock to be a quality long-term investment, the recent correction has not yet changed my view that potential buyer, especially for short to medium term investors, should wait for a further pullback.

Below are some supportive facts for existing shareholders to continue holding the stock:

1. JNJ is priced somewhat attractively relative to its comps. According to the table shown below, JNJ's consensus revenue, EBITDA, and EPS growth estimates are considerably above the averages for its major peers. The company's various profitability margins and capital return metrics are mostly in line with the comps averages. In terms of leverage and liquidity, JNJ carries a below-average debt load. Its free cash flow margin is above the group average. Both JNJ's current and quick ratios are just slightly below par, still reflecting a healthy balance sheet condition.

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JNJ's current valuation multiples at 10.0x forward EBITDA and 15.5x forward EPS (next 12-month basis) are on average 5% above the comps-average multiples. Given the company's outperforming growth potential, the small premium is completely reasonable. In addition, after accounting for the 5-year earnings growth estimate, JNJ's PEG ratio of 2.4x is 13% below par. As the company's margin performance and liquidity position are fairly comparable to the peer averages, the PEG discount actually suggests an attractive valuation on a relative basis (see chart above).

2. Following JNJ's Pharmaceutical R&D Review meeting, Deutsche Bank issued a research note on May 24 commenting on the key takeaways (sourced from Thomson One, Equity Research), which suggest a promising prospect for JNJ:

"J&J expects to submit over 10 new product filings and 25+ brand extensions by 2017. J&J also noted that according to IMS Health, its Pharma business was the faster growing amongst the top 10 largest pharmaceutical companies in Europe, the US, and Japan. We believe this will continue to be the pace and J&J's Pharma business should continue to outpace its peers. We also believe that the worst is now behind for the Consumer McNeil issues and believe that trend swill improve within Medical Devices & Diagnostics."

3. The stock offers a decent 3.2% dividend yield and a healthy dividend growth rate. Since 2009, the company has been raising the dividend every 12 months at a rate of at least 6% (see chart below). Given the facts that JNJ's dividend payout ratio remains healthy at 65% on a trailing basis and that the firm has been able to maintain a steady free cash flow margin over the past 5 years (see chart below), I believe the current pace of the dividend growth can be sustained at least over a medium term.

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Despite the above positives, there are some valuation issues that potential investors should consider before pulling the trigger:

1. Over the past 6 months, JNJ's forward P/E multiple has expanded by 18% (see chart below).

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However, the rise in multiple was not supported by any significant corporate developments as JNJ's consensus revenue, EBITDA, and EPS estimates for the current and next fiscal years have experienced multiple downward revisions over the period (see charts below).

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2. JNJ's forward P/E ratio is currently trading above the same multiple of S&P 500 Index (see chart above). As the company's consensus 5-year earnings growth estimate at 6.4% is below the average estimate of 8.2% for the S&P 500 companies and its P/E ratio rarely traded above the market in the past 12 months, I would consider buying at a below-market valuation.

3. From a historical standpoint, JNJ's current valuation also seems to be a little rich. The stock's trailing P/E is now near its 5-year high (see chart below).

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Nevertheless, JNJ's ROE metric has decreased notably over the past 5 years (though the metric has stabilized recently) and the market only expects JNJ to maintain a flat EBITDA margin over the current and next fiscal years. Moreover, JNJ's consensus EPS estimates for the next few quarters are just in line with the historical average (see charts below).

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Bottom line, current shareholders should stick with the investment given JNJ's healthy prospects and sustainable dividend, especially with a low buy-in cost. For margin of safety reason, potential buyers should wait for a pullback or consider selling out-of-money put options to establish a long position.

All charts are created by the author except for the consensus estimate tables, which are sourced from S&P Capital IQ, and all financial data used in the article and the charts is sourced from S&P Capital IQ unless otherwise specified.

Source: Johnson & Johnson: Buy In The Current Pullback?