With a market cap of $340 billion, Johnson & Johnson (NYSE:JNJ), the healthcare giant, is currently number 37 on the Fortune 500 list. Over the past 12 months, JNJ stock is down about 7%. This compares to a more than 16% drop in the iShares U.S. Pharmaceuticals ETF (NYSEArca:IHE) which includes JNJ shares at a whopping 22.6% weighting among its 45-stock portfolio.
In August, the consumer and pharmaceutical healthcare firm made the news when an Oklahoma judge found Johnson and Johnson guilty of helping fuel the state’s opioid crisis by aggressively marketing painkillers. The ruling came amid various lawsuits that the company faces regarding its talc-based baby powder.
Now many investors are wondering whether there could be more headaches ahead for the company and how the JNJ stock price might fare in the last quarter of the year. Until its next earnings report in mid-October, I expect JNJ shares to trade between a range, mostly $120-$130. Long-term investors may regard any upcoming weakness in the Johnson & Johnson stock price as opportunity to buy into the shares.
How Johnson & Johnson Stock Makes Money
Johnson & Johnson has a broad-based business model with a wide global reach. The group operates in three segments that provide it with diversified sources of revenue, earnings and cash flow:
- Pharmaceutical (contributes more than 50% of JNJ’s pretax profits)
- Medical Devices & Diagnostics
JNJ’s Pharmaceutical division provides treatments for immunology, cardiovascular and metabolic diseases, pulmonary hypertension, infectious diseases and cancer. The group builds its moat by investing heavily in a diverse pharmaceutical pipeline. The segment includes psoriasis drugs like Stelara and Tremfya, myeloma treatment Darzalex, and prostate cancer drug Zytiga.
Several well-known brands within its Consumer division include Aveeno, Band-Aid, Johnson’s Baby, Listerine, Neutrogena, Rogaine, Tylenol and Zyrtec.
JNJ’s Medical Devices & Diagnostics business develops and markets products and solutions for surgery, orthopedics, and vision. The segment includes Acuvue contacts and Ethicon surgical products. In the past few years, JNJ has acquired several medical technology and device companies globally to help expand its portfolio.
The group’s diversification enables the company to withstand economic cycles more effectively. No matter what the economy does, consumers will buy the products of many of these strong brands, and Johnson & Johnson will likely have industry-leading market share in many areas.
Although about 60% of JNJ stock’s revenue is U.S.-based, with global operations — especially emerging markets — proving to be important growth catalysts.
JNJ Stock Posted Robust Q2 Earnings
On July 16, Johnson & Johnson reported second-quarter net income of $5.61 billion, or $2.08 per share. The numbers marked a 42% increase YoY.
Although net sales dropped 1.3% to $20.56 billion, they still came in ahead of JNJ stock analysts’ consensus of $20.29 billion. In Q2 all three Johnson & Johnson segments performed better than expected.
One of the challenges faced by JNJ and other drug companies is falling sales as blockbuster drugs come off patent and face biosimilar competition. For example, over the past year, sales figures for its top-selling drug Remicade which contributes 5% of total sales have been lower than anticipated.
Therefore, the pressure to innovate and diversify is part of the reality of managing a global leader like Johnson & Johnson. And in JNJ’s case this diversification has been the group’s competitive advantage. As one segment faces headwinds, the others usually help propel the company forward.
JNJ stock’s forward P/E ratio stands at 14.4x and compares well with many of its industry peers. Many investors would be comfortable with paying more for an operationally robust business such as Johnson & Johnson.
Meanwhile, long-term Johnson & Johnson stock investors also enjoy a current dividend yield of almost 3%. The conglomerate has raised its dividend each year for over half a century. Investors who reinvest their dividends enjoy further growth. And dividends tend to create a “price floor” for coveted stocks such as JNJ.
Where JNJ Stock Price Is Now
No investor has a crystal ball that can predict the markets’ next move. However, analyzing the recent price action of JNJ stock may give us an indication of what to expect in the weeks ahead.
Year-to-date, JNJ stock is flat. Its 52-week range has been $121.00 (Dec. 24, 2018) – 148.99 (Dec. 4, 2018).
Pharmaceutical industry is known for legal challenges and recurring claims against companies like Johnson & Johnson. For example, earlier in the summer the Federal Trade Commission issued civil subpoenas to the company to determine whether JNJ had violated antitrust laws with Remicade, its rheumatoid arthritis drug.
In the long-run, the actual amount of various fines does not necessarily dent the fundamental metrics of pharma companies much. However, short-term, investors understandably get spooked by uncertainty created by legal claims.
In other words, I do not expect the Johnson & Johnson stock price to reach any new highs until we have more clarity on full ramification of this relatively recent legal development.
As the earnings season gets under way, there might also be weakness in the broader markets, including pharmaceutical companies. Then JNJ shares would also be adversely affected, especially into October.
If you are an investor who also pays attention to technical analysis, you may be interested to know that short-term charts are painting a mixed picture and urging caution. While long-term investors would like to see the JNJ stock price to stay over $130, short-term traders are likely to keep the shares between $120 and $130.
In recent weeks, the stock has found support around the $125 level. Therefore, I’d consider buying the stock if it falls toward or even below $120. I’d especially wait until the next earnings report on Oct. 15 to analyze the fundamentals of the group.
Bottom Line on JNJ Stock
I remain bullish on the long-term outlook of Johnson and Johnson stock, especially of the potentially improving prospects of Medical Devices & Diagnostics and Pharmaceutical segments. However, in the short-term, JNJ share price might exhibit weakness.
Therefore, investors may consider waiting on the sidelines if they do not currently have any positions open in JNJ stock.
Alternatively, if they already own shares, investors may either consider hedging their positions. As for hedging strategies, covered calls or put spreads with an Oct. 18 expiry could be appropriate. Straight put purchases could be expensive due to heightened volatility. Any short-term decline in these shares may offer better entry points for long-term investors.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.