Johnson & Johnson: Don't Get Too Excited

| About: Johnson & (JNJ)

Summary

Johnson & Johnson reported generally good Q1 results though sales continue to struggle due to currency impacts.

The stock rally has the yields shrinking to levels usually signaling a top.

The current valuation of Johnson & Johnson provides limited upside and the company isn't signaling any reason to own the stock at these levels.

Before the open, Johnson & Johnson (NYSE:JNJ) reported Q1 results that generally excited the market and sent the stock to new highs. The numbers though weren't that great and investors might need to curb there enthusiasm.

The stock has rallied from below $95 to nearly $114 Tuesday. The results included a roughly 7% gain in earnings and revenues (when excluding the impact of divestitures). The company though continues to provide a big clue to the valuation equation with the pace of share buybacks for a stock worth over $300 billion now.

JNJ is a solid company with decent sales growth if not for the ongoing currency impacts. The problem though is that the stock now trades for over 16x forward analyst EPS estimates. The forecast is for the pharma company to only grow earnings at a rate of less than 10% per year. In some cases, the growth rate might only reach 5%.

One key signal to the valuation equation is the lack of strong capital returns despite the big balance sheet. The company ended Q1 with $17 billion in net cash, yet JNJ only forecasts spending $5 billion on stock buybacks for the rest of the year. The buyback yield amounts to 1.6% of the total market cap so a rather meager amount. At the same time, the company has another $2.5 billion approved for stock buybacks that management has no intention to rush out and spend this year.

The stock offers a decent 2.9% dividend yield, but the net payout yield that adds in the net stock buyback yield is trending down as the stock surged this year. Over the last two years, the stock has traded opposite of the yield. In this case, the yield is declining fast.

JNJ Chart

JNJ data by YCharts

Another sign that the stock is at least hitting a short-term peak is that the sentiment on Seeking Alpha for JNJ is 90% bullish. This figure isn't scientific, but typically a signal that the market is too positive on a stock.

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The key investor takeaway is that the trade in JNJ is very crowded with the stock at these levels. The currency impact will start alleviating the sales growth issues going forward, but investors must justify the stock trading at 17x forward earnings for gains from here.

JNJ is a good company, but don't get too excited with the stock at these levels.

Disclosure: I/we 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.