Is It A Good Time To Buy JNJ Stock?

I recommend Johnson & Johnson’s (NYSE:JNJ) share price as a Buy.

After reviewing JNJ’s latest results, its key indicators, and future-looking financial forecasts I rate Johnson & Johnson as deserving of a Buy investment grade. JNJ’s mid teens forward FY 2022 P/E ratio is not too high and I am optimistic about the company’s long-term outlook due to the decision to separate its lower-margin and slower-growing consumer health division.

What was the impact of Johnson & Johnson Stock Earnings?

Johnson & Johnson announced the Q4 2021 results of the company on January 25, 2022 , just before the market officially opened.

It’s only natural that JNJ’s latest quarterly financial results attracted attention, due to the company’s leadership position in the health care sector. JNJ is described as an organization “engaged in the study and research, manufacturing and distribution of a wide variety of products within the field of health care” in its filing for the 2021 10-K. JNJ also describes JNJ as “the world’s largest and the most widely-based healthcare business” 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 the 24th of January, 2022, to $172.77 on February 2nd, 2022. The firm’s solid performance in the stock market following the announcement of its latest results is backed by the Q4 performance of 2021 and its forward-looking forecast for 2022.

According to its Q4 2021 earnings release press conference, Johnson and Johnson’s revenue as well as non-GAAP adjusted earnings per share increased by +10.4 percent YoY and +14.5 percent YoY up to $24.8 billion, and $2.13 and $2.13, respectively. Additionally, JNJ’s bottom line in the quarter ended on a +0.5 percent higher than the market consensus estimate.

While JNJ’s revenue for Q4 2021 was -1.9 percent lower than the consensus of analysts on the sell side estimate, the midpoint of the company’s revenue 2022 estimate of $99.65 billion was found to be +2.0 percent higher than what analysts had expected. In addition, Johnson & Johnson’s mid-point guidance for EPS for the fiscal year 2022 was $10.50 and was +1.7 percent higher over Wall Street analysts’ expectations.

In the next section, I will highlight two important indicators that investors must be aware of in the context of Johnson and Johnson’s latest financial results.

JNJ Stock Key Metrics

I believe that the most important indicators for JNJ is the company’s sales growth segment by segment as well as its profit margins.

There is a distinct divergence between the results of Johnson and Johnson’s business segments in the quarter ending in 2021 and the year 2021. For the last fiscal year, JNJ’s medical and pharmaceutical business segments had high growth rates of double-digits on top line. However, the consumer health segment only had one-digit growth in revenue for both the most recent fiscal year as well as the most recent quarter. It is also notable that the segment focusing on consumer health has the lowest profit margins before tax of all three segments in Q4 2021 as well as FY 2021, too.

It is evident that Johnson &Jones’ consumer health segment is a major obstacle to the overall growth of revenue as well as being the least profitable of the company’s three segments. Therefore, it is logical to JNJ to segregate its consumer health division from the other fast-growing companies within the company, which is precisely the way Johnson & Johnson is doing.

On the 12th of November, 2021 the Seeking Alpha news article cited an article in the Wall Street Journal piece which stated the fact that JNJ “will divide its medical device and drug business from its consumer product group, resulting in two publicly traded 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 included “accelerating the performance we believe we can achieve through an appropriate strategy” and “unlocking the value of shareholders, as the majority of these transactions have done previously.”

According to an article that was published in The Pharma Letter, which describes it a source of “business information about the global biotechnology, pharmaceutical and generic industries” Johnson & Johnson’s consumer health division could be worth more than by $45 billion. This would be equivalent to around 10% of JNJ’s market capitalization, making the proposed value unlocking deal an important one. Johnson & Johnson guided at JPMorgan’s 40th Annual Healthcare Conference that the separation of the consumer health business is expected to occur “towards 2023’s end.”

Additionally, Johnson & Johnson is doing well despite the rising cost pressures, which is evident in the company’s Profit margins for Q4-2021, as in the graph below. The gross profit margin of JNJ and its the non-GAAP adjusted net profits margin grew in a 270-basis point increment and 80 basis points YoY to 67.9 percent and 22.9 percent, respectively during the last quarter.

Johnson and Johnson’s Q4 2021 Profit and Loss Statement

In the Q4 2021 earnings conference call, Johnson & Johnson explained why it is still able to deliver profits growth during the fourth quarter, stating that “given the size of our business, we believe we can always improve our structure, operating model and infrastructure to increase leverage in our P&L (Profit & Loss).” Additionally, other segment-specific aspects included a proper mix of sales as well as positive leverage in the operating pharmaceutical industry as well as a return to normal manufacturing processes (following interruptions during 2020) in the medical device business.

In sum, a look of Johnson & Johnson’s segmental revenues growth and profitability in Q4 2021 offers a positive outlook for JNJ. Profit margins of the company have increased YoY during Q4 2021, despite the negative impact of inflation. Additionally, JNJ is aware of the differences in revenue growth and profitability between the consumer health segment and the two other segments and has suggested an end to the problem.

What is JNJ’s Stock’s Future?

JNJ is expected to perform very well in the coming year.

The company has outlined an increase of a single digit in both its top line as well as its bottom line in FY 2022. This is in line with sell-side analysts’ consensus fiscal 2022 estimates for financials, which suggest an +6.2 percent increase in the revenue of Johnson & Johnson and +7.4 percent increase in its normalized earnings per share.

As I mentioned in the previous part, JNJ has been able to offset more than the negative effects of inflation in the fourth quarter of 2021 in order to realize margin growth. I am confident of the fact that Johnson & Johnson can deliver the +50 basis point operating profit margin growth guidance and achieve a single percent growth on its net profit, based on the guidance it provided and what market expectations are.

Looking ahead into the JNJ stock forecast for 2023, and further “the brand new Johnson & Johnson”, which JNJ calls the company that will comprise medical and pharmaceutical companies, is expected to achieve a more rapid top line growth and greater profit margins, without the negative impact of the health care consumer segment. This is the primary factor that will drive JNJ’s shares.

Are JNJ the Stock A Good Buy, Sell or Hold?

JNJ stock is an investment I would recommend as a Buy. Johnson & Johnson currently trades at a 15.7 times the consensus forward normalized P/E as according to S&P Capital IQ data which is quite attractive considering its past ROEs of over 30% and its consistent single-digit growth rates on top line. Additionally, JNJ is now valued by the market at less than its five-year average consensus forward the next 12 months’ normalized P/E of around 16.8 times. I believe that the dissolution of the consumer health division in 2023 could be an incentive to revise the valuation of JNJ’s shares. This is in line with my Buy rating for the company.