Johnson & Johnson (NYSE:JNJ) has been rallying for the past three months, with the stock moving higher by 16%. Prior to the current rally, JNJ was sideways amidst volatility for almost nine months. With a strong technical support around $130, I believe that Johnson & Johnson stock will continue to rally post-fourth-quarter-2019 results.
Since equity markets are trading near record high levels, let’s first address the valuation perspective. JNJ stock currently trades at a price-to-earnings ratio of 16.4, an attractive number when compared to the S&P 500 P/E of 25.1. With earnings growth expected at 6.8% on an annual basis over the next five years, Johnson & Johnson does look attractive.
Beta and Dividend Numbers Make JNJ Stock Attractive.
First, the stock has a beta of 0.71. Exposure to a defensive stock makes sense when markets are trading at expensive valuations.
Second, Johnson & Johnson currently pays an annual dividend of $3.80, implying a dividend yield of 2.6%. With 10-year Treasury bonds yielding 10.8%, JNJ is attractive when you factor in that the company’s bonds are AAA-rated.
Of course, valuation isn’t the only consideration. Johnson & Johnson will continue to grow in the coming years, ensuring sustained rewards for shareholders.
I want to quickly mention that in January, a Philadelphia judge drastically reduced the punitive damages JNJ will need to pay in a lawsuit over the antipsychotic drug Risperdal. The fine was slashed by 99.9% from $8 billion to $6.8 million, and while Johnson & Johnson still has around 13,000 pending cases related to Risperdal, the slashing of damages comes as a big relief from a credit perspective.
The Pharmaceutical Division Will Drive Growth
For the third quarter of 2019, Johnson & Johnson reported 5.1% sales growth in the pharmaceuticals segment and 1.6% for the consumer segment. However, the company reported a decline of 3.1% in sales by the medical device segment.
Clearly the pharmaceutical division is the top-line growth driver, and I believe the segment will continue to trigger growth in the coming quarters.
First, for Q3 2019, the company invested $2.6 billion in research and development, implying an annualized R&D spending of $10.4 billion. This will translate to sustained growth via new drugs and discoveries. As an example, Johnson & Johnson got regulatory approval for six drugs in Q3 2019 with regulatory submissions for another five drugs. Strong R&D investment will hopefully lead to new discoveries that will continue to trigger sales growth.
Second, for Q3 2019, growth in the pharmaceutical segment was driven by drugs including Stelara, Darzalex and Imbruvica, among others. These drugs will continue to drive growth in Q4 2019 and beyond. Furthermore, international sales growth has been even stronger than sales growth in the United States. Asia Pacific and Africa in particular have the potential to deliver healthy growth in the coming years. The company reported worldwide sales growth of 1.9% for Q3 2019, but sales growth in Asia Pacific and Africa was 7.3%.
Investments in Medical Robotics
In February 2019, Johnson & Johnson acquired Auris Health for a consideration of $3.4 billion. Auris is a robotics technology developer with an “FDA-cleared platform currently used in bronchoscopic diagnostic and therapeutic procedures.”
I believe that strong financial muscles give Johnson & Johnson the flexibility to pursue inorganic growth in high potential areas. For example, the medical robotics market will be worth $22.1 billion by 2027. Between 2018 and 2027, the market is expected to grow at a CAGR of 14.6%.
The acquisition therefore gives JNJ entry into a high growth market. Besides the acquisition, the company also participated in $54 million series C financing for Histosonics, also in the field of medical robotics.
As the market for medical robotics grows, Johnson & Johnson stands to benefit as one of the early movers.
The Bottom Line on JNJ Stock
In conclusion, I believe that the company’s Q4 2019 will remain strong, driven by growth in the pharmaceutical segment. Johnson & Johnson stock has surged higher in the recent past, but there is more juice in the rally considering the valuations.
From a long-term perspective, global growth still has immense scope and can be a top-line growth driver. Investment in R&D and inorganic grow will provide further earnings acceleration.
I remain bullish on JNJ stock for the near term as well as the long term.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
