Johnson & Johnson Stock Has Limited Upside

JNJ has been in the news for the wrong reasons lately, but the stock still offers some good

It’s been a rough year for consumer and pharmaceutical healthcare giant Johnson & Johnson (NYSE:JNJ). From cancer-causing baby powder to a nationwide opioid crisis to a huge settlement for one of its drugs giving a male patient breasts, Johnson & Johnson has been hit from all angles over the past 52 weeks. As it has, JNJ stock has dropped. Shares are down more than 7% during that stretch, versus a slight gain for the S&P 500.

Negative Press Presents a Buying Opportunity with JNJ Stock
Source: Sundry Photography /

At current levels, there’s two ways to look at Johnson & Johnson stock.

The first is that this glass is half full. Current optical issues won’t stick around forever. Once they pass, the focus will shift back to the fundamentals. Those fundamentals — which remain resilient and stable — imply that JNJ stock has runway to a $150 price tag (15% upside from current levels).

The second is that this glass is half empty, and the other half of the glass won’t fill up soon. Current optical issues won’t stick around forever, but they will stick around for the foreseeable future, and Johnson and Johnson’s legal saga in particular looks like it will drag on for a while longer. As such, the focus won’t return to the fundamentals anytime soon. And, when it does, the stock only has 15% upside potential – which really isn’t enough to compensate for all the optical risks.

Big picture, Johnson & Johnson stock is a mixed bag with decent, but ultimately, limited upside potential. And that upside lacks clarity with respect to when it will materialize.

If you like that setup, I can’t fault you — there’s also a 3% yield to keep you warm while the stock gets bogged down by optical risks. But, if you’re trying to generate alpha, I’d skip JNJ stock.

The Good News About Johnson and Johnson

The good news about Johnson & Johnson stock is three-fold. First, current optical risks won’t stick around forever. Second, the fundamentals are resilient and stable. Third, JNJ stock is cheap relative to its growth prospects.

On the first point, everything is going wrong for Johnson & Johnson today. Things can’t go on like this forever. Indeed, the company’s baby powder scandal already seems to be in the rear-view mirror, while the opioid scandal is increasingly moving into the rear-view mirror as all that appears to be left are legal-related actions. Potentially soon, the optical risks which have weighed on JNJ stock for a year will pass.

On the second point, Johnson & Johnson’s fundamentals remain resilient and stable. There are essentially three big businesses here — the consumer business (which sells health and wellness products that have steady demand), the pharma business (which sells various medicines that consumers will always need) and the medical devices business (which sells components into a secular growth industry). That means JNJ should remain a steady, low single-digit revenue growth business with stable margins.

On the third point, JNJ stock is cheap considering this steady growth reality. My modeling suggests that low single-digit revenue growth plus stable margins will lead to roughly $13 in earnings per share by fiscal 2025. Based on a market and historical average 16-times forward earnings multiple, that implies a 2024 price target of $208. Discounted back by 7% per year, that equates to a 2019 price target of roughly $150.

The Bad News

The bad news about Johnson & Johnson stock is also three-fold. First, current optical risks won’t stick around forever, but they will stick around for the foreseeable future. Second, the fundamentals are decent, but not great. Third, the upside potential isn’t that compelling considering the optical risks.

Bears will argue that while optical risks will eventually phase out, they won’t phase out anytime soon. This company still has a lot of legal hurdles to jump through on the opioid front, while many in Washington are still gunning for drug makers to cut prices. These risks will eventually pass. But, not today, and not within the next few months.

At the same time, the core fundamentals underlying JNJ stock are stable — but nothing to write home about. By my numbers, this company projects as a 6%-7% EPS grower over the next few years. Consensus Street estimates agree. That’s anemic growth. The market’s long-term earnings growth rate is north of 12%. Thus, while Johnson & Johnson is a stable company, it’s growth profile is relatively muted relative to growth profiles elsewhere in the market.

For many investors, 15% potential upside doesn’t look like that much, especially if the timing surrounding that upside lacks clarity.

Bottom Line on JNJ Stock

Here and now, Johnson and Johnson stock is a mixed bag. There’s some good. There’s some bad. Ultimately, putting JNJ into your portfolio depends on who you are as investor.

Risk adverse? OK with muted returns? Like yield? Go ahead and buy JNJ.

Risk seeking? Seeking alpha? Don’t care about yield? Skip JNJ.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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