Earlier this week, Fed Chair Jerome Powell cautioned that interest rates would likely rise higher than the central bank policymakers expected. As renewed recession fears will keep the stock market under pressure, investors looking for a safe stock may consider Johnson & Johnson (JNJ). In this piece, I have discussed several reasons that make JNJ a safe play.
For fiscal 2022, JNJ reported a 1.3% year-over-year rise in sales and a 3.2% year-over-year increase in adjusted earnings to $27 billion. In addition, its adjusted EPS came in at $10.15, representing an increase of 3.6% over the prior-year period.
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 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,” he added.
For the fourth quarter ended December 31, 2022, JNJ’s U.S. sales rose 2.9% year-over-year to $12.52 billion, while its International and Worldwide sales declined 11.5% and 4.4% year-over-year to $11.19 billion and $23.71 billion, respectively.
For fiscal 2022, the company’s U.S. and Worldwide sales rose 3% and 1.3% year-over-year to $48.58 billion and $94.94 billion, respectively. On the other hand, its International sales declined 0.6% year-over-year to $46.36 billion.
JNJ’s sales were flat last year due to a fall in vaccine sales, the lack of tax credits, and the strengthening of the U.S. dollar. 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 is expected to spin off its consumer products unit under a new business called Kenvue in November. This new business will include popular brands such as Neutrogena, Band-Aid, Listerine, Tylenol, and others.
JNJ’s revenue has grown at a CAGR of 5% over the past three years. The company’s EBIT grew at a CAGR of 6.6% over the past three years. Likewise, its net income has grown at a CAGR of 5.9% during the same time frame.
JNJ's four-year average dividend yield is 2.60%, and its forward annual dividend of $4.52 translates to a 2.96% yield. Its dividend has grown at a 6% CAGR over the past three years. The company paid a quarterly dividend of $1.13 per share on March 7, 2023.
The stock has declined 13.4% in price year-to-date and 9.3% over the past year to close the last trading session at $152.96.
Here’s what could influence the performance of JNJ in the upcoming months:
Positive Recent Developments
On December 22, 2022, JNJ announced the completion of its acquisition of Abiomed. JNJ’s CEO, Joaquin Duato, said, “This acquisition marks another important step on Johnson & Johnson’s path to accelerating growth in our MedTech business and delivering innovative medical technologies to more people around the world.”
On March 4, 2023, The Janssen Pharmaceutical Companies of JNJ announced final pooled long-term safety results for STELARA (ustekinumab) through five years in adults with moderately to severely active Crohn’s disease and four years in adults with moderately to severely active ulcerative colitis (UC), as well as final four-year clinical and endoscopic outcomes from the UNIFI long-term extension study evaluating the efficacy of STELARA for the treatment of adults with moderately to severely active UC.
UNIFI study author Waqqas Afif, M.D. Associate Professor, Department of Medicine; Division of Gastroenterology at McGill University Health Centre in Montreal, Canada, said, “These data reinforce the known efficacy and safety profile of STELARA, and demonstrate it can be an effective long-term treatment option for patients living with moderately to severely active ulcerative colitis.”
Solid Financials
JNJ’s U.S. sales increased 2.9% year-over-year to $12.52 billion for the fourth quarter ended January 1, 2023. The company’s adjusted net earnings increased 9.5% year-over-year to $6.22 billion. Also, its adjusted EPS came in at $2.35, representing an increase of 10.3% year-over-year.
Favorable 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.
Discounted Valuation
In terms of forward non-GAAP P/E, JNJ’s 14.55x is 24.7% lower than the 19.32x industry average. Its 12.24x forward EV/EBITDA is 8.5% lower than the 13.37x industry average. Likewise, its 13.37x forward EV/EBIT is 17.8% lower than the 16.26x industry average.
High Profitability
In terms of trailing-12-month gross profit margin, JNJ’s 67.36% is 21.4% higher than the 55.48% industry average. Likewise, its 0.51x trailing-12-month asset turnover ratio is 50% higher than the industry average of 0.34x. Furthermore, the stock’s trailing-12-month levered FCF margin came in at 20.21% compared to the negative 3.99% industry average.
POWR Ratings Show Promise
JNJ has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. JNJ has a B grade for Value, consistent with its discounted valuation.
It has a B grade for Quality, in sync with its high profitability. The stock has a 0.53 beta, justifying its A grade for Stability.
JNJ is ranked #5 out of 169 stocks in the Medical – Pharmaceuticals industry. Click here to access JNJ’s Growth, Momentum, and Sentiment ratings.
Bottom Line
With JNJ hiving off its consumer health segment into a separate entity, the stock is expected to become even more attractive as the company will be able to focus more on its highly profitable pharmaceutical business. Also, the acquisition of Abiomed will help it enter the high-growth cardiovascular space. Moreover, given its promising pipeline of drugs and therapies, its long-term prospects look bright.
Given its robust financials, favorable analyst estimates, discounted valuation, high profitability, and stable dividend payouts, it could be safe 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 rose $0.19 (+0.12%) in premarket trading Thursday. Year-to-date, JNJ has declined -12.68%, versus a 4.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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