I rate Johnson & Johnson’s (NYSE:JNJ) share price as a Buy.
After reviewing JNJ’s recent results, its key indicators, and the financial forecasts for the future I rate Johnson & Johnson as deserving of a Buy investment grade. JNJ’s mid-teens forward FY 2022 P/E number isn’t that high, and I am positive regarding the company’s outlook for the near-term given its decision to segregate its lower-margin and slower-growing consumer health division.
How Were Johnson & Johnson Stock Earnings?
Johnson & Johnson announced the Q4 results for 2021 on the 25th of January, 2022 prior to the market opened.
It is natural that JNJ’s recent quarterly financial results drew attention, because of the company’s dominance in the field of healthcare. JNJ is described as a business “engaged in research and development, production and distribution of a wide assortment of products in the healthcare field” in its filing for the 2021 10-K. JNJ also describes itself as “the world’s largest and most widely-based healthcare business” on its website for corporate purposes.
Johnson & Johnson’s shares did relatively well after the announcement of the results. JNJ’s share price rose by +6.0% from $162.97 on December 24, 2022, to $172.77 at the time of February 2, 2022. JNJ’s impressive performance on the stock market after the publication of its recent results is backed by the performance of its Q4 2021 and its forward-looking guidance for 2022.
The JNJ stock forecast – As per its Q4 2021 earnings press release, Johnson & Johnson’s revenues and non-GAAP-adjusted earnings per share rose by +10.4 percentage YoY and +14.5% YoY to $24.8 billion and $2.13 and $2.13, respectively. Additionally, JNJ’s bottom line during the 4th quarter of the year was +0.5 percent higher than the market consensus’s estimate.
The revenue from JNJ’s fourth quarter of 2021 was -1.9 percent lower than the consensus sell-side analysts’ estimate, the mid-point of the company’s revenue 2022 estimate of $99.65 billion turned out to be +2.0% better than what analysts had expected. Additionally, Johnson and Johnson’s mid-point guidance for EPS for 2020 was $10.50 and was +1.7 percent more over Wall Street analysts’ expectations.
In the next section, I highlight two key metrics that investors must be aware of in the context of Johnson and Johnson’s most recent financial results.
JNJ Stock Key Metrics
I think the key indicators for JNJ include the company’s revenue expansion by segment and profit margins.
There is a distinct divergence between the results of Johnson and Johnson’s business divisions for Q4 2021 and FY 2021. The most recently fiscal year, JNJ’s medical and pharmaceutical business segments posted high growth rates of double-digits on top line. In contrast, its consumer health business only achieved single-digit revenue growth rates for both the recent fiscal year as well as the most recent quarter. It is also noteworthy that the consumer health segment has the lowest profit margins before tax of the three segments in the fourth quarter of 2021 and FY 2021 as well.
It is evident that Johnson & Johnson’s consumer health business is a hindrance to the company’s overall revenue growth and is its smallest of the three segments. It is logical to JNJ to differentiate its consumer health segment from the other faster growing businesses within the company and this is exactly the way Johnson & Johnson is doing.
On November 12 2021, a Seeking Alpha news article cited an article from the Wall Street Journal piece which stated that JNJ “will split its drug and medical devices business from its consumer products group, resulting in two publicly traded companies.” Notably, Johnson & Johnson emphasized at the JPMorgan (JPM) 40th Annual Healthcare Conference that the two reasons for the planned dissolution of the business for consumer health were “accelerating the performance we believe we can achieve through the right model” and “unlocking profits for shareholders like the majority of these transactions have before.”
According to an article in The Pharma Letter that calls itself a service that provides “business details on the global biotechnology, pharmaceutical, and generic industries” Johnson &Jobsen’s consumer health business could possibly get a price in excess to $45 billion. This amounts to about 10% of JNJ’s current market capitalization, which makes the proposed value unlocking deal an extremely significant one. Johnson & Johnson guided at JPMorgan’s 40th Annual Healthcare Conference that the separation of its consumer health business will occur “towards 2023’s end.”
In addition, Johnson & Johnson is coping well despite inflationary cost pressure, and this can be seen in the Q4 2021 profit margins as shown in the chart below. JNJ’s gross profit margin and Non-GAAP-adjusted net profit margin expanded to +270 basis points, and +80 basis points YoY , to 67.9 percent and 22.9 percent, respectively at the end of the current quarter.
Johnson and Johnson’s Q4-2021 Profit & Loss statement
On the company’s Q4 2021 earnings conference call, Johnson & Johnson explained why it can still achieve an improvement in profitability in the fourth quarter. The company said that “given the scale of our business we think we could continuously improve the infrastructure, our operational model to leverage this P&L (Profit & Loss).” Other segment-specific elements included an optimal sales mix with positive operational leverage to the pharmaceutical industry and a gradual normalization of production operations (following disruptions to production in the 2020 year) to the medical device business.
In summary, a review of Johnson &Johnson’s segmental sales growth and profitability for Q4 2021 gives a positive outlook to JNJ. The profit margins of the company have increased YoY during Q4 2021 notwithstanding the negative impacts of inflation. In addition, JNJ is aware of the different growth rates and profitability of the consumer health segment as well as its two other divisions, and has proposed the separation of these two segments to address the problem.
What Is JNJ Stock’s Forecast?
JNJ is expected to perform exceptionally this year.
The company has outlined the growth of single digits or higher in its top and bottom line for FY 2022. This is in line with sell-side analysts’ consensus fiscal 2022 estimates for financials, which point to a +6.2 percent growth in Johnson & Johnson’s revenue and +7.4 percent growth in its normalized profits per share.
As I explained in the previous portion, JNJ has been able to more than offset the negative effects of inflation in Q4 2021, enabling it to grow its margins. I am confident I believe that Johnson & Johnson can deliver on its +50 basis points operating profit margin expansion guidance and deliver a double digit percentage growth at the bottom of their earnings based on its guidance and what the market expects.
Looking forward to 2023 and beyond “the the new Johnson & Johnson”, which JNJ refers to as the new entity that includes the medical devices and pharmaceutical businesses, should be able to generate relatively more rapid top line growth and better profit margins without the negative impact of the health care consumer segment. This could be the most important catalyst for JNJ’s shares.
Is JNJ stock a Buy, Sell or Hold?
JNJ stock is an investment I would recommend as a Buy. Johnson & Johnson currently trades at 15.7 times consensus forward normalized multiple of P/E as in S&P Capital IQ data, and this is reasonably attractive taking into account its historical ROEs above 30% and the consistent single-digit top-line growth rates. Additionally, JNJ is now valued by the market at less than its five-year mean forward consensus next twelve months’ normalized P/E, which is around 16.8 times. I think that the separation of the consumer health division by 2023 could act as a catalyst to re-rate JNJ’s shares. This is in line with my Buy rating on the name.