Johnson & Johnson: A Definite Buy at Current Price Levels

Johnson & Johnson (JNJ) announced on Monday that it is buying up to $10 billion of its own stock. While this represents only about 5% of its outstanding shares at the current market value, I think this is a great move. Shareholders have had to endure a flat stock price over the last two years. In that span, JNJ is down about 2%, while the S&P is up about 25%. Hopefully this is the catalyst that gets the shares moving again.

Johnson & Johnson is such a quality company, and I think the shares are a screaming buy at this level. JNJ currently trades at just 17.7 times trailing 12 months earnings versus an average PE of 21.5 over the last five years. Based on analyst estimates, JNJ's stock has a forward PE is just 15.5. In the last 10 years, JNJ's stock hasn't traded anywhere near the price multiple that we're seeing now.

The stock is also trading at just 4 times book value, versus its five-year average of 5.7 times. And the current price-to-sales ratio is 3.3, against a five-year average of 3.9.

If we apply these valuation ratios against historical levels, JNJ's stock should be trading anywhere from $70 to $75 right now, 10% to 16% premium from the current level.

Shares of Johnson & Johnson came under pressure recently when the FDA recommended that more studies be conducted on the safety of JNJ's anemia drug, and said that warning labels on the drug should be strengthened. But JNJ is one of the most diversified pharma companies in the world. The recent addition of some top-notch consumer brands that JNJ purchased from Pfizer will, while possibly putting some pressure on margins, provide revenue stability and position JNJ as the premier provider of over-the-counter health products to consumers.

Warren Buffett says that all companies will have problems from time to time, and JNJ certainly has had its share recently. But it's definitely hard to ignore shares in this quality company at these price levels.

Disclosure: I own shares in Johnson & Johnson

JNJ 1-yr chart

Comments

[david]

Fundamentally, what products does it have in the pipeline that it will be imperative to buy. I would have to see a set of these stretching out quite a few years to get back into this stock.

[rnairb]

I am a fan of JNJ (Disclosure I own JNJ).

Look at the cash flow this company generates. The patent issues are certainly going to have an impact short term but in the long term this a terrific company that will continue to make money for shareholders.