Source: PaxForex Premium Analytics Portal, Fundamental Insight
Johnson & Johnson is one of the greatest names in health care. The company is known for brands such as Tylenol, Benylin, and Aveeno. The company makes a wide range of drugs in various therapeutic areas, including oncology, immunology, infectious diseases, neurology, and others. The company also manufactures medical devices, including orthopedic products.
This diversification has given the company some resilience to recent market turmoil. J&J stock fell a modest 3% year-over-year, outperforming the S&P 500, which is down 23%. It has been a safe stock for years, but does the health care company offer enough value to be a good investment today?
The main reason Johnson & Johnson is a safe buy is because of its strong financial performance. Over the past 12 months, the company has generated $18.4 billion in profits on revenues of $95.6 billion, a 19% profit margin. The company also generated a free cash flow of just under $20 billion during this time period.
In its most recent earnings report for the second quarter (ended July 3), the company showed resilience in its sales, with revenue up 3% year over year to $24 billion. While this was modest growth, it came despite adverse factors in the economy (e.g., inflation, supply chain issues) that have created problems for many businesses.
Looking ahead, results should improve even further after Johnson & Johnson spins off its consumer health care segment, which is a slow-growing part of its business.
Johnson & Johnson plans to separate its consumer health business into a separate company next year. This will allow the company to focus on faster-growing segments -- medical devices and pharmaceuticals.
Last year, sales of consumer health products totaled $14.6 billion, an increase of 4.1 percent over the previous year. By comparison, medical device sales of $27.1 billion were up 17.9%, and pharmaceuticals revenues of $52.1 billion were up 14.3%.
By getting rid of the consumer health care business, the company will be able to focus more on those areas of its business that have more potential growth opportunities and are less of a headache for the company. J&J is facing tens of thousands of lawsuits related to its baby talcum powder products, which are in the consumer health care segment.
Investors are currently paying 24 times earnings for Johnson & Johnson stock. Here's how that compares to some of the other leading health care stocks:
The company doesn't trade at a very cheap price, but it's also not egregiously expensive compared to other stocks, given the long-term stability it offers. The average Health Care Select Sector SPDR Fund stock trades at a price-to-earnings ratio of just under 20. Johnson & Johnson, one of the leading health care companies, deserves a higher ratio than the average stock, so its valuation doesn't seem too high right now.
The main reasons you'll want to buy J&J stock are its stability and its dividend yield, which is currently 2.7% - better than the S&P 500's average yield of 1.8%. J&J stock is also the king of dividends because it has raised its payout for 60 consecutive years, so long-term investors can expect to receive more dividend income for years to come. It's not a guarantee, but as long as the business remains as profitable as it is today, you can be sure the dividend will grow.
However, if you are a growth investor, you may want to look elsewhere, as Johnson & Johnson has not been a great investment without outperforming the market in the last five years. The move away from consumer health care to more efficient segments may improve the company's growth prospects, but the success of that move won't be evident until next year. For now, growth-oriented investors should divest from the company's stock.
As long as the price is above 164.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 164.53
- Take Profit 1: 167.00
- Take Profit 2: 170.00
Alternative scenario:
If the 164.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 164.00
- Take Profit 1: 162.00
- Take-profit 2: 160.00
