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Johnson & Johnson: Is It A Buy Right Now?

|About: Johnson & Johnson (JNJ)

Summary

JNJ's stock should be included in every diversified large-cap dividend growth portfolio.

JNJ has shown considerable earnings per share surprise in each one of the last four quarters, and it demonstrated significant improvement in its profitability.

JNJ is generating strong cash flows, and it returns value to its shareholders by stock buyback and increasing dividend payments.

Although it is not much of a bargain right now, in my view, Johnson & Johnson Ltd. (NYSE:JNJ) stock should be included in every diversified large-cap dividend growth portfolio. Pharmaceuticals will continue to be key growth drivers for the company; Johnson & Johnson has a promising pipeline of seven compounds in Phase III trials, and some of its immunology and Oncology drugs are gaining market share. Johnson & Johnson has made a commitment of up to $200 million to accelerate and significantly expand the production of an Ebola vaccine program in development. Since the Ebola virus disease is a primary concern for the world health, success in the development of Ebola vaccine will be a strong economic and prestige achievement for the company.

JNJ's stock has performed well over the last few years. Since the start of the year, JNJ's stock has gained 17.6%, while the S&P 500 index has risen 12.2%, and the Nasdaq Composite Index also has increased 14.3%. Nevertheless, considering its good valuation metrics and its solid earnings growth prospects, the stock, in my opinion, still has room to run. The company has shown considerable earnings per share surprise in each one of the last four quarters, and it demonstrated significant improvement in its profitability. In addition, the company is generating strong cash flows, and it returns value to its shareholders by stock buyback and increasing dividend payments.

The Company

Johnson & Johnson is engaged in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. Johnson & Johnson has more than 250 companies located in 60 countries around the world. The company was founded in 1885 and is based in New Brunswick, New Jersey.

Valuation Metrics

The table below presents the valuation metrics of Johnson & Johnson; the data were taken from Yahoo Finance and finviz.com.

JNJ's valuation metrics are pretty good; the company has a low debt, and the Enterprise Value/EBITDA ratio is low at 11.33. The forward P/E is at 17.45, and the average annual earnings growth estimates for the next five years is at 6.47%.

Latest Quarter Results

On October 14, Johnson & Johnson reported its third-quarter 2014 financial results, which beat EPS expectations by $0.05 (3.45%) and beat Street's consensus on revenues.

Source: 3Q 2014 Presentation

In the report, Alex Gorsky, Chairman and Chief Executive Officer, said:

Our strong third-quarter performance reflects the continued success of our new products and the strength of our core business. We are making deliberate portfolio choices, positioning us well for achieving our near-term priorities and our long-term growth drivers. I am proud of our colleagues around the world who are focused everyday on delivering solutions to address the evolving health care needs.

Dividend and Share Repurchase

The forward annual dividend yield is at 2.59% and the payout ratio only 34.8%. The annual rate of dividend growth over the past three years was at 7.1%, over the past five years was at 7.6%, and over the past ten years was at 10.8%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and JNJ's performance has been very good in this respect.

JNJ Dividend Chart

JNJ Dividend data by YCharts

Since the company generates lots of cash, and the payout ratio is low, there is a good chance that the company will continue to raise its dividend payment.

In July, the Company announced a share repurchase program of up to $5.0 billion of the company's common stock. Repurchases may be made at management's discretion from time to time on the open market or through privately negotiated transactions. The repurchase program has no time limit and may be suspended for periods or discontinued at any time.

Competitors and Group Comparison

A comparison of key fundamental data between Johnson & Johnson and its main competitors is shown in the table below.

Source: Yahoo Finance, finviz.com

Johnson & Johnson has the lowest debt-to-equity ratio and the lowest trailing P/E among the stocks in the group. However, its forward P/E is the highest.

JNJ's Margins and Return on Capital parameters have been much better than its industry median, its sector median, and the S&P 500 median, as shown in the tables below.

Source: Portfolio123

Technical Analysis

The charts below give some technical analysis information.

Chart: finviz.com

The JNJ stock price is 0.30% above its 20-day simple moving average, 3.09% above its 50-day simple moving average and 7.73% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.17 and flat, which is a neutral signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 60.61, which does not indicate overbought or oversold conditions.

Analyst Opinion

Many analysts are covering the stock, but their opinion is divided. Among the twenty-two analysts, three rate it as a Strong Buy, six rate it as a Buy, and thirteen analysts rate it as a Hold.

Is JNJ's performance improving?

In order to give an answer to this question, I compared JNJ's latest trailing 12 months' values of six relevant parameters to their previous trailing 12 months' values and to the five years' average values. The results are shown in the table below; the data were taken from Portfolio123.

All trailing 12 month values of the Margins parameters and the Return on Capital parameters were above the previous 12 month values, and above the five years' average.

In my opinion, these results demonstrate significant improvement in the profitability of the company.

Major Developments

Along with its latest earnings release, the company increased its earnings guidance for full-year 2014 to $5.92 - $5.97 per share, from previous guidance of to $5.85 - $5.92 per share.

Source: 3Q 2014 Presentation

Pharmaceuticals will continue to be key growth drivers for the company. Pharmaceutical segment accounted for 45% of the company's sales in the latest quarter. Moreover, pharmaceutical has shown 18.7% operational growth in the last quarter, while Medical Devices and Diagnostics (35.5% of sales) has shown a negative operational growth of -4.6%, and the consumer segment (19.5% of sales) has shown only 0.3% operational growth.

Source: 3Q 2014 Presentation

Johnson & Johnson has a promising pipeline of seven compounds in Phase III trials along with recent product line extensions. JNJ believes it can achieve ten new drug approvals from 2013-2017. Johnson & Johnson is the U.S. market leader in immunology, and its drugs STELARA® & SIMPONI® / SIMPONI® ARIATM are gaining market share. However, sales of its hepatitis C drug, Olysio, might decline in 2015 following the approval of Gilead Sciences' HCV drug, Harvoni, in October 2014.

On November 07, Johnson & Johnson announced the completion of the acquisition of Alios BioPharma, Inc., a privately held clinical stage biopharmaceutical company focused on developing therapies for viral diseases, for a total purchase price of approximately $1.75 billion in cash. The acquisition includes Alios BioPharma's portfolio of potential therapeutics for viral infections with the promising compound AL-8176, an orally administered antiviral therapy currently in Phase 2 studies for the treatment of infants with respiratory syncytial virus. RSV is the last of the major pediatric diseases that currently has no effective therapy. The acquisition also includes two early-stage compounds for hepatitis C that could potentially augment Janssen's existing HCV portfolio.

The development of a new drug for hepatitis C is very important for JNJ, since Gilead Sciences' HCV drugs are gaining market share. More than 2.7 million Americans are currently infected with liver-damaging hepatitis C, according to U.S. federal officials.

On October 22, Johnson & Johnson announced that it has made a commitment of up to $200 million to accelerate and significantly expand the production of an Ebola vaccine program in development at its Janssen Pharmaceutical Companies. The company is closely collaborating with the World Health Organization, the National Institute of Allergy and Infectious Diseases, as well as other key stakeholders, governments, and public health authorities on the clinical testing, development, production and distribution of the vaccine regimen.

The vaccine regimen, which was discovered in a collaborative research program with the National Institutes of Health, combines a Janssen preventative vaccine with a vaccine from Bavarian Nordic, a biotechnology company based in Denmark. This combination vaccine regimen has shown promising results in preclinical studies, and is now planned to be tested for safety and immunogenicity in healthy volunteers in Europe, the United States of America and Africa starting in early January. Janssen is targeting production of more than one million doses of the vaccine regimen in 2015, 250,000 of which are expected to be released for broad application in clinical trials by May 2015.

Since the Ebola virus disease is a primary concern for the world health, success in the development of Ebola vaccine will be a strong economic and prestige achievement for the company.

Johnson & Johnson has shown earnings per share surprise in each one of the last four quarters, as shown in the table below.

Data: Yahoo Finance - Analyst Estimates

In my opinion, the fact that the company has succeeded to beat analyst expectations quarter after quarter by a considerable margin, demonstrates the strength of its business. Hence, there is a good chance that Johnson & Johnson will continue to surprise by reporting better than estimate results also in the future.

JNJ's stock has performed well over the last few years. Since the start of the year, JNJ's stock has gained 17.6%, while the S&P 500 index has risen 12.2%, and the Nasdaq Composite Index also has increased 14.3%. Moreover, since the beginning of 2013, JNJ's stock has gained 53.7%, while the S&P 500 index has increased 45.4%, and the Nasdaq Composite Index has risen 58.1%. Nevertheless, considering its good valuation metrics and its solid earnings growth prospects, the stock, in my opinion, still has room to run.

Conclusion

Pharmaceuticals will continue to be key growth drivers for the company; Johnson & Johnson has a promising pipeline of seven compounds in Phase III trials, and some of its immunology and Oncology drugs are gaining market share. Johnson & Johnson has good valuation metrics and solid earnings growth prospects; its enterprise value-to-EBITDA ratio is low at 11.33. The company has shown considerable earnings per share surprise in each one of the last four quarters, and it demonstrated significant improvement in its profitability. In addition, the company is generating strong cash flows, and it returns value to its shareholders by stock buyback and increasing dividend payments. All these factors bring me to the conclusion that JNJ's stock is a smart long-term investment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.