I recommend Johnson & Johnson’s (NYSE:JNJ) stocks as Buy.
After reviewing JNJ’s recent earnings, key metrics, and forward-looking financial projections I rate Johnson & Johnson as deserving of a Buy investment grade. JNJ’s mid teens forward FY 2022 P/E multiple is undemanding, and I am positive about the company’s long-term outlook due to its decision to segregate its lower-margin and slower-growing consumer health division.
What were Johnson & Johnson Stock Earnings?
Johnson & Johnson announced the Q4 results for 2021 on January 25, 2022 before the market officially opened.
It’s natural that JNJ’s latest quarterly performance in the financials attracted attention due to the company’s leadership position in the field of healthcare. JNJ defines itself as a business “engaged in research and development, manufacture and sale of a broad array of products in the field of health care” in its filing for the 2021 10-K. It also refers to JNJ as “the largest and most broadly based healthcare company” on its website for corporate purposes.
Johnson &Johnson’s shares performed fairly well following the announcement of results. JNJ’s shares increased by +6.0 percent from $162.97 on December 24, 2022, to $172.77 at the time of February 2 2022. The firm’s solid stock price performance following the announcement of its latest results is backed by the performance of its Q4 2021 and its forward-looking forecast for 2022.
As per its Q4 2021 announcement of earnings, Johnson & Johnson’s non-GAAP adjusted earnings per share grew by +10.4% YoY and +14.5 percentage YoY up to $24.8 billion and $2.13, respectively. Additionally, JNJ’s bottom line in the quarter ended on a +0.5% higher than the market consensus’s estimates.
The revenue from JNJ’s fourth quarter of 2021 reached -1.9% below the consensus of analysts on the sell side estimate, the mid-point of the company’s revenue 2022 guidance at $99.65 billion turned out to be +2.0% better than what the market had anticipated. In addition, Johnson & Johnson’s mid-point EPS guidance in FY 2022 was $10.50 and was +1.7 percent more over Wall Street analysts’ expectations.
In the next section, I highlight two key indicators that investors need to be aware of in the context of Johnson and Johnson’s latest financial results.
JNJ Stock Key Metrics
I think the key indicators for JNJ include the company’s revenue growth per segment and its profit margins.
There is a stark difference regarding the financial performance of the Johnson and Johnson’s business units for Q4 2021 and FY 2021. The most recently fiscal year JNJ’s pharmaceutical and medical device business segments posted double-digit top line growth rates. However, the consumer health business has only the single digit rate of growth for both the recent fiscal year as well as the most recent quarter. It is also notable that the segment focusing on consumer health has the lowest pre-tax profit margins of all three segments in Q4 2021 and FY 2021 too.
It is clear that Johnson &Jones’ consumer health division has a negative impact on the overall growth of revenue and is the least profitable of the company’s three segments. It is reasonable for JNJ to separate its consumer health business from the other, more rapidly growing businesses within the company and that’s exactly the way Johnson & Johnson is doing.
On the 12th of November 2021 on the 12th of November, 2021, a Seeking Alpha news article cited an article in the Wall Street Journal piece which noted the fact that JNJ “will split its medical device and drug business from its consumer-related products group, creating two public companies.” In addition, Johnson & Johnson emphasized at the JPMorgan (JPM) 40th Annual Healthcare Conference that the two objectives of the planned separation of the consumer health division were “accelerating performance that we believe it is possible to achieve using a fit-for-purpose model” and “unlocking value for shareholders as most of these transactions have before.”
According to a report published in The Pharma Letter, which describes itself a supplier of “business details on the global biotechnology, pharmaceutical and generic industries” Johnson &Jones’ consumer health division could fetch a valuation in excess that of $4 billion. This amounts to about 10% of the company’s market capitalization, which makes this value unlocking acquisition important. Johnson & Johnson guided at JPMorgan’s 40th Annual Healthcare Conference that the consumer health business’ separation should occur “towards 2023’s end.”
Separately, Johnson & Johnson is performing well despite inflationary cost pressures, which can be seen in the Q4 2021 profit margins, as according to the chart below. JNJ’s gross profit margin and Net profit adjusted to non-GAAP margin grew by +270 basis points and +80 basis points YoY to 67.9 21% and 22.9%, respectively for the latest quarter.
Johnson and Johnson’s Q4 2021’s Profit & Loss Statement
In its Q4 2021 earnings call, Johnson & Johnson explained why it can still achieve an increase in profit in the fourth-quarter, noting that “given the scale of our business we think we could always improve kind of the infrastructure, our operating model to gain leverage on this P&L (Profit & Loss).” Also, the other segment-specific aspects included a proper mix of sales with positive operational leverage to the pharmaceutical business; and a normalization of manufacturing processes (following disruptions in 2020) in the medical devices business.
In summary, a review of Johnson & Johnson’s segmental revenue growth and profitability in Q4 2021 is positive for JNJ. The margins for profit of the company have increased year-over-year in Q4 2021, despite the negative effects of inflation. Also, JNJ is aware of the different growth rates and profitability between the consumer health segment and its other two segments and has suggested an end to the problem.
What’s the upcoming JNJ stock forecast?
JNJ is forecasted to perform exceptionally this year.
The company has outlined a high-single digit increase in its top and bottom line for FY 2022. This is aligned with the sell-side analysts’ consensus fiscal 2022 estimates for financials, which indicate a +6.2% increase in Johnson & Johnson’s revenue and +7.4 percentage growth in its normalized profits per share.
As I mentioned in the previous article, JNJ has been able to more than offset the negative effects of inflation in the fourth quarter of 2021 to achieve margin expansion. I am confident of the fact that Johnson & Johnson can deliver on its +50 basis points operating profit margin growth guidance, and generate a high-single percentage increase at the bottom of their earnings based on its guidance and what investors expect.
Looking forward into 2023, and further “the new Johnson & Johnson”, which JNJ refers to as the new entity that includes the pharmaceutical and medical devices companies, is expected to create a relatively higher top line growth as well as greater profit margins, without the drag from the consumer health segment. This should be the primary driver for the shares of JNJ.
Is JNJ Stock A Buy, Sell, or Hold?
JNJ stock is an investment that I consider to be a Buy. Johnson & Johnson currently trades at 15.7 times consensus forward normalized P/E multiple as per S&P Capital IQ, and this is reasonably attractive when you consider its history of ROEs above 30% and its consistent single-digit growth rates in its top line. Additionally, JNJ is now valued by the market at less than its five-year median consensus forward next twelve months’ normalized P/E of approximately 16.8 times. I believe that the detachment of the consumer health segment in 2023 could be an impetus to raise the price of JNJ’s shares, which supports my Buy rating for the company.
