Why Johnson & Johnson Looks Undervalued At $145


Johnson & Johnson’s stock (NYSE: JNJ) has outperformed the broader markets as well as some of its peers over the last few weeks. While J&J stock grew 32% since the recent lows of March 23, the S&P 500 gained 26%. Looking at other pharmaceutical giants, Roche gained 27%, Novartis is up 20%, Pfizer 30%, and Merck 17%. If we look at the returns since the beginning of the year, J&J has significantly outperformed with a 1% gain vs. a decline of 13% for the S&P 500. Why is that? The healthcare sector, in general, has remained resilient throughout the crisis, thus far. For J&J, it is working on a potential vaccine for COVID-19, and it is in a better position to scale the production, compared to some of its peers.

Having said that, J&J is not immune to the current crisis. Its Medical Devices segment in particular can underperform the other two segments, Pharmaceuticals, and Consumer Healthcare, due to postponement of elective surgeries impacting the demand for medical devices. However, we believe that the market overreacted to these concerns, and we estimate J&J’s valuation to be $169 per share – roughly 15% ahead of the current market price. Our price estimate takes into account the latest earnings as well as the company’s guidance. Our valuation is based on 4 factors, J&J’s Total Revenue, its Net Income Margin, No. of Shares, and P/E Multiple. We discuss these factors below.

  • J&J’s Revenues have seen a moderate increase of 7.3% from around $76.5 billion in 2017 to $82.1 billion in 2019 and we expect it to fall to $81.6 billion in 2020. An expected 8% decline in the Medical Devices segment will likely offset the 4% and 1% gains in Pharmaceuticals and Consumer Healthcare revenues in 2020, as detailed in our interactive dashboard analysis on J&J Revenues.
  • The company’s Non-GAAP Net Income has increased from around $20.0 billion in 2017 to $23.3 billion in 2019 and we expect it to fall to $21.4 billion in 2020. This change is likely to be led by lower revenues and weaker margins, as shown in J&J’s Margins  dashboard.
  • J&J’s Non-GAAP EPS has increased from $7.44 in 2017 to $8.81 in 2019, and we expect it to fall to $8.22 in 2020. The change in EPS can be attributed to a reduction in adjusted net income and a lower expected share count due to stock repurchases.
  • Our Price Estimate of $169 For Johnson & Johnson’s Stock is based on our Detailed Valuation Model, and implies a 20.6x P/E multiple on expected 2020 Adjusted EPS of $8.22. J&J has historically traded at a higher P/E multiple, when compared to some of its peers, as shown in our J&J Valuation dashboard.
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Do you know that J&J is one of the frontrunners working on a COVID-19 vaccine?

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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