Should You Hold Johnson & Johnson (JNJ)?

These days, most drug stocks Eli Lilly (LLY), with its pipeline of weight loss drugs.

So, it wasn’t much of a surprise when markets knocked down shares of Johnson & Johnson (JNJ) when the company reported results that beat on earnings but missed slightly on revenues.

Like Pfizer (PFE), JNJ is watching its sales plunge from waning Covid vaccine demand.

Yet, as that moves further into the rearview mirror, financial pros are looking hard at the financials, wondering if now is the time to step into JNJ.

Here are our thoughts.

Johnson & Johnson’s Business

With a history extending back over 135 years, Johnson & Johnson has become a staple in many of our lives.

Once a healthcare conglomerate, Johnson & Johnson spun off its consumer health business into a new company called Kenvue in late 2023.

That left the remaining core segments:

• Innovative Medicine (63% of total revenues) – Focuses on developing treatments for an array of complex diseases, leading the charge in medical innovation.
• MedTech(37% of total revenues) – Provides cutting-edge technology that revolutionizes patient care, from surgery to orthopedics.

Within the first category, overall sales continue to climb despite the drag from COVID-19 sales. Yet, Oncology sales continue to grow rapidly, accounting for one of the largest revenue items in this segment.

Source: Q1 2024 Earnings Presentation

On the other hand, MedTech is doing fantastic, with total sales up 4.5% YoY led by cardiovascular’s stellar 22.5% growth.

Source: Q1 2024 Earnings Presentation

Financials

Source: Stock Analysis

Outside of the pandemic, JNJ’s sales have grown steadily, albeit slowly.

In fact, it’s one of the steadiest pharma companies we’ve reviewed, with margins remarkably stable, especially free cash flow.

Total debt is $30.4 billion with $22.9 billion in cash, a solid balance sheet given the typical free cash flow of around $20.0 billion annually.

JNJ buys back around $5.0 billion in stock while paying $11.7 billion in dividends, giving a total effective yield of around 4.8%.

Valuation

Source: Seeking Alpha

JNJ trades at a fairly cheap valuation compared to its peers.

Its price-to-cash flow at 15.4x is the second lowest only to Abbvie’s (ABBV) 12.8x.

And it runs the group’s cheapest P/E ratios.

Growth

Source: Seeking Alpha

However, JNJ’s growth isn’t comparable to its peers.

Its average growth over the three and five-year period is less than 1%.

And the drag created by COVID-19 vaccines puts last year and the forward forecast slightly into negative territory when you account for exchange rates and other items.

Profitability

Source: Seeking Alpha

Despite its steady performance, JNJ’s margins aren’t always the best, save for its cash generation.

So, its returns on equity, assets, and total capital are good but not great.

Our Opinion 6/10

JNJ is a steady company. But it’s not exciting.

We don’t see a lot of growth here. Without that, you’re looking at a perpetual cash payer.

That’s great and easy to value. But you only want to buy those stocks when they trade at deep discounts, which this is not at.

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