Although the sheer size of the 23% gain since its January low has finally started to weight it down, Johnson & Johnson (JNJ) made a loud and clear statement over the course of the last five months as JNJ stocks tore into record high territory.
The statement? This old company is hardly a dinosaur that only grandpas own.
Still, that much of a run-up is a tough act for any stock to follow, and with a trailing price-to-earnings ratio of 21.1, it’s tough to imagine there being any more room for additional upside anytime soon … or maybe there is.
Next year’s bottom line is expected to roll in 7% higher than last year’s per-share income.
It’s not jaw-dropping, two-year growth, but for a company with a market cap of $319 billion and annual sales of just a hair more than $70 billion, that’s significant.
What Got Into JNJ?
If there was any single catalyst for the stock’s ascension, it had to be the company’s fourth-quarter earnings announcement in late January. They were … ok. Although sales of $17.81 billion just missed analysts’ estimates of $17.94 billion and were down 2.4% from the prior year’s Q4 top line, earnings of $1.44 per share of JNJ sock topped estimates of $1.42 per share.
It wasn’t the numbers themselves that excited investors, however. Oh, the earnings beat certainly meant something. The market was far more compelled by a couple of other glimmers of hope.
One of them was diabetes drug Invokana. Its revenue surged 123% last year, surpassing the annualized $1 billion threshold that unofficially qualifies it as a blockbuster drug. Only launched in 2013, that’s a lot of progress in not a lot of time, and the drug’s sales have already exceeded peak expectations.
The even-bigger prod for bullishness from JNJ stock: The full-year outlook was even better than expected. The consumer health behemoth anticipated a 2016 bottom line of between $6.43 and $6.58 per share, versus analyst estimates of only $6.38 per share, on average. The outlook was founded on undeniable improvements for all of the company’s divisions.
In the meantime, its cancer drug Imbruvica was approved as a frontline therapy for chronic lymphocytic leukemia, opening that revenue door a little wider.
Johnson & Johnson: Looking Ahead
While the stock’s big advance may have been well deserved, the maximum upside of Imbruvica, Invokana and the company’s acquisition of NeuWave Medical are arguably already priced into the stock. What does the company have for an encore?
More than you might think.
While the last several months have been defined by continued growth of its pharmaceutical division, the near-term drug pipeline looks a bit weak. Concerned investors need not worry that much though. What JNJ lacks in the way of a drug pipeline it more than makes up for with its medical equipment and device pipeline.
Take it with a small grain of salt, since the figures came from the company itself, but Johnson & Johnson says it has got hospital devices currently in the works that could drive more than $6 billion in sales (presumably per year). For consumers, it’s working on devices that could drive more than $2 billion in revenue.
Those are big numbers … and a bit ambiguous in terms of “how” and “when” they may be realized. They’re not terribly tough to believe, however.
For instance, Johnson & Johnson has developed a major presence on the diabetes management front, and aims to launch a mealtime insulin-injecting patch later this year. In that the insulin market is nearing $30 billion per year, even a small sliver of that pie could prove to be a real boost for JNJ.
Bottom Line for JNJ Stock
Still, will a new use of Imbruvica, continued growth of Invokana and even a series of new device launches rekindle the rally from JNJ stock and push it back into new-high territory again with it already trading at more than 21 times its trailing earnings? On their own, that’ll be tough, making the stock more of a sell then a buy right now … even if just for defensive purposes.
However, there is an ace up the company’s sleeve, although it has not wanted to play it. Johnson & Johnson could do what some activists have been clamoring for it to do a while now. That is, break out the consumer division from the rest of the company.
The odds are against it happening … at least this year. Wells Fargo analysts explained:
“We believe the likelihood of Johnson & Johnson (ticker: JNJ ) announcing a spinoff of its Consumer division in 2016 is relatively low because: 1) the Consumer division’s current margins are relatively low compared to its peers (14% versus 20% on average) due to the product recalls a few years ago and subsequent consent decree, and this would reduce the division’s current valuation; and 2) Chief Executive Alex Gorsky’s comments at our health-care conference in September suggest to us that Johnson & Johnson is willing to consider spinning off one of its three segments if the segment’s performance does not meet the company’s goals for that segment, however, Mr. Gorsky was very clear that in September the company was committed to all of its segments for at least the next three years.”
The rationale makes sense. Indeed, even current holders of JNJ stock would have a tough time arguing the longer-term effort holds more long-term value than the short-term fix of a company split would. That doesn’t mean they still don’t want it to happen right now though.
Whatever’s in the cards, while JNJ has been one of 2016’s surprising heroes, there just aren’t a lot of paths to an even frothier valuation from here.
Even if J&N executes everything perfectly for the remainder of 2016 and some of that ballyhooed devices start to launch, their success is already priced into the stock’s present value. There’s not a lot of upside left to tap here.
In fact, buying JNJ stock now may represent a significant opportunity cost.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
