Despite inflation cooling over the past few months, it still remains well above the Fed’s 2% target. Moreover, the recently released February jobs report showed that nonfarm payrolls rose by 311,000 in February, higher than the 225,000 estimates, indicating a tight labor market.
Federal Reserve Chairman Jerome Powell has said that stronger-than-expected economic data in recent weeks suggests “the ultimate level of interest rates is likely to be higher than previously anticipated.”
Given the uncertain macroeconomic climate, the stock market is expected to remain under pressure. Thus, I think investing in a well-established stock like Johnson & Johnson (JNJ) could be wise for investors, given its financial strength and solid dividend yield. In this piece, I have discussed several reasons why JNJ is a clear buy this year.
Pharmaceutical stocks are well known for their ability to withstand the ups and downs of the economy. Pharma companies enjoy inelastic demand for their products irrespective of the economic cycle, helping them maintain their profit margins.
JNJ reported a strong financial performance in the fourth quarter and fiscal 2022. JNJ’s EPS was 5% above the consensus estimate in the fourth quarter, while its revenue missed analyst estimates by 0.8%.
JNJ’s Chairman of the Board and CEO, Joaquin Duato, said, “Our full year 2022 results reflect the continued strength and stability of our three business segments, despite macroeconomic challenges. As we look ahead to 2023, Johnson & Johnson is well-positioned to drive near-term growth while also investing strategically to deliver long-term value.”
For fiscal 2023, the company expects its adjusted operational sales growth, excluding the Covid-19 vaccine, to come between 3.5% and 4.5%. JNJ’s adjusted operational EPS is expected to come between $10.40 and $10.60. In addition, its adjusted EPS is expected to come in the range of $10.45 and $10.65.
JNJ’s acquisition of Abiomed, Inc. (ABMD) was announced on December 22, 2022. This acquisition will help the company accelerate growth in its MedTech business segment and deliver innovative medical technologies to more people worldwide.
JNJ’s dividend has grown at a 6% CAGR over the past three years. It pays a forward annual dividend of $4.52 that yields 2.98% on the current market price. It has a four-year average dividend yield of 2.60%. The company paid a quarterly dividend of $1.13 per share on March 7, 2023.
The company’s shares have fallen 6.5% over the past month and 10.6% over the past year to close the last trading session at $151.61. However, Wall Street analysts expect the stock to hit $180 in the near term, indicating a potential upside of 18.7%.
Here are the factors that could influence JNJ’s performance in the upcoming months:
Robust Financials
JNJ’s U.S. sales increased 2.9% year-over-year to $12.52 billion for the fourth quarter ended January 1, 2023. Its non-GAAP net earnings rose 9.5% year-over-year to $6.22 billion. The company’s non-GAAP EPS increased 10.3% from the year-ago value to $2.35.
Strong Historical Growth
JNJ’s revenue grew at a CAGR of 5% over the past three years. Its EBIT grew at a CAGR of 6.6% over the past three years. In addition, its EPS grew at a CAGR of 6.1% in the same time frame.
Discounted Valuation
In terms of forward non-GAAP P/E, JNJ’s 14.43x is 23.4% lower than the 18.84x industry average. Its 12.14x forward EV/EBITDA is 6.4% lower than the 12.97x industry average. Likewise, its 13.26x forward EV/EBIT is 16.2% lower than the 15.82x industry average.
High Profitability
In terms of the trailing-12-month gross profit margin, JNJ’s 67.36% is 21.4% higher than the 55.48% industry average. Its trailing-12-month levered FCF margin came in at 20.21% compared to the negative 3.99% industry average. Likewise, its 0.51x trailing-12-month asset turnover ratio is 51.4% higher than the industry average of 0.34x.
Positive Analyst Estimates
Analysts expect JNJ’s EPS for fiscal 2023 and 2024 to increase 3.6% and 4.1% year-over-year to $10.51 and $10.94, respectively. Its revenue for fiscal 2023 and 2024 is expected to increase 2.8% and 2.6% year-over-year to $97.62 billion and $100.20 billion, respectively. It surpassed Wall Street EPS estimates in each of the trailing four quarters.
POWR Ratings Show Promise
JNJ has an overall A rating, equating to a Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. JNJ has an A grade for Stability, in sync with its 0.53 beta. Also, it has a B grade for Value consistent with its discounted valuation.
Its high profitability justifies its B grade for Quality.
JNJ is ranked #5 of 167 stocks in the Medical- Pharmaceuticals industry. Click here to access JNJ’s Growth, Momentum, and Sentiment ratings.
Bottom Line
Despite the macroeconomic challenges, JNJ reported a strong financial performance in the final quarter and fiscal 2022. As it hives off its consumer health segment into a new company later this year, it can direct its complete attention to its highly lucrative pharmaceutical business.
The company’s long-term prospects look bright, given its strategic acquisitions and a strong pipeline of drugs and therapies.
Given its robust financials, favorable analyst estimates, solid historical growth, discounted valuation, high profitability, and solid dividend payouts, it could be wise to buy the stock now.
How Does Johnson & Johnson (JNJ) Stack up Against Its Peers?
JNJ has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Medical - Pharmaceuticals industry with an A (Strong Buy) rating: Novo Nordisk A/S (NVO), Bristol-Myers Squibb Company (BMY), and Novartis AG (NVS).
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JNJ shares were trading at $154.98 per share on Monday morning, up $3.37 (+2.22%). Year-to-date, JNJ has declined -11.64%, versus a 1.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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