Warren Buffet, the Oracle of Omaha, has created exceptional wealth through his investments. Investors widely follow the billionaire’s stock picks. Healthcare giant Johnson & Johnson (JNJ) happens to be one of his holdings.

For investors looking for stocks that are long-term wealth creators, JNJ could be a perfect fit. In addition to capital appreciation, the company shared its profits periodically with investors as dividends for 59 years.

Persistently high inflation and the Fed’s aggressive interest rate hikes have led to recession fears and triggered a broad-based sell-off in various asset classes. However, JNJ has been able to survive the market conditions well because of the defensive nature of its business and sound fundamentals.

Healthcare stocks are well known for their stability during economic uncertainties. That’s because, irrespective of the economic cycles, the healthcare industry witnesses stable demand.

JNJ surpassed consensus EPS and revenue estimates in the third quarter (ended September 2022). Its EPS beat analyst estimates by 2.6%, and its revenue surpassed the consensus EPS estimate by 1.5%. CEO Joaquin Duato said, “Our third quarter performance demonstrates our continued strength and resilience across all three of our businesses.”

“Through the ongoing efforts of our teams around the world, we continue to navigate the dynamic macroeconomic environment and remain focused on delivering transformative healthcare solutions,” he added.

JNJ is expected to create more value for its shareholders as it hives off its consumer health segment, which includes various self-care, skin health/beauty, and essential products, into a separate company. The consumer health segment has reported a decline of 0.4% year-over-year compared to the MedTech and Pharmaceutical Products segments, with 2.1% and 2.6% year-over-year growth, respectively.

For fiscal 2022, the company expects its operational sales to come between $97.50 billion to $98 billion, while its adjusted operating EPS is expected to arrive between $10.70 and $10.75. JNJ CEO Joaquin Duato said, “Looking ahead, I remain confident in our business and ability to continue advancing our innovative portfolio and pipeline.”

JNJ’s revenue has grown at a CAGR of 5.5% over the past three years. The company’s EBITDA grew at a CAGR of 4.6% over the past three years.

With the kind of cash the company generates, JNJ can easily opt for organic and inorganic expansion, which will spearhead the company’s growth in the long term. On November 1, 2022, JNJ announced that it had entered into a definitive agreement to acquire Abiomed. The transaction is expected to broaden Johnson & Johnson MedTech’s (JJMT) position as a growing cardiovascular innovator.

CEO Joaquin Duato said, “The addition of Abiomed is an important step in executing our strategic priorities, and our vision for the new Johnson & Johnson focused on Pharmaceutical and MedTech. We have committed to enhancing our position in MedTech by entering high-growth segments. The addition of Abiomed provides a strategic platform to advance breakthrough treatments in cardiovascular disease and helps more patients worldwide while driving value for our shareholders.”

JNJ four-year average dividend yield is 2.60%, and its forward annual dividend of $4.52 translates to a 2.62% yield. Its dividend has grown at a 5.7% CAGR over the past three years.

The stock has gained 0.8% in price year-to-date and 6.1% over the past year to close the last trading session at $172.45.

Here’s what could influence the performance of JNJ in the upcoming months:

Solid Financials

JNJ’s sales increased 1.9% year-over-year to $23.79 billion for the third quarter ended September 30, 2022. The company’s net earnings increased 21.6% year-over-year to $4.45 billion. Also, its EPS came in at $1.68, representing an increase of 22.6% year-over-year.

Favorable Analyst Estimates

Analysts expect JNJ’s EPS for fiscal 2022 and 2023 to increase 2.5% and 3.2% year-over-year to $10.04 and $10.37, respectively. Its revenue for fiscal 2022 and 2023 is expected to increase 1.3% and 2.6% year-over-year to $95.04 billion and $97.55 billion, respectively. It surpassed Wall Street EPS estimates in each of the trailing four quarters.

Mixed Valuation

In terms of forward non-GAAP P/E, JNJ’s 17.17x is 5% lower than the 18.08x industry average. Likewise, its 15.28x forward EV/EBIT is 7% lower than the 16.43x industry average.

However, its 4.39x forward non-GAAP PEG is 163.4% higher than the 1.66x industry average. Also, its 4.74x forward P/S is 15% higher than the 4.13x industry average.

High Profitability

In terms of trailing-12-month gross profit margin, JNJ’s 67.52% is 24.3% higher than the 54.31% industry average. Likewise, its 0.54% trailing-12-month asset turnover ratio is 55.9% higher than the industry average of 0.35%. 

Furthermore, the stock’s trailing-12-month ROCE and ROA came in at 26.45% and 10.94%, respectively, compared to the negative industry averages.

POWR Ratings Show Promise

JNJ has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. JNJ has a C grade for Value, consistent with its mixed valuation.

It has a B grade for Quality, in sync with its high profitability. The stock has a 0.57 beta, justifying its A grade for Stability.

JNJ is ranked #4 out of 164 stocks in the Medical – Pharmaceuticals industry. Click here to access JNJ’s Growth, Momentum, and Sentiment ratings.

Bottom Line

JNJ is a core part of Warren Buffet’s portfolio as it has not only delivered returns through capital appreciation but has also shared its profits with shareholders as dividends. The company has been consistently growing its revenues and earnings, and analysts expect it to keep growing its top and bottom-line numbers over the next two years.

Moreover, with JNJ hiving off its consumer health segment into a separate entity, the stock is expected to become even more attractive. Also, the acquisition of Abiomed will help it enter the high-growth cardiovascular space. Given its robust financials, higher-than-industry profitability, and stable dividend payouts, it could be a solid investment this fall.

How Does Johnson & Johnson (JNJ) Stack up Against Its Peers?

JNJ has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Medical – Pharmaceuticals industry with an A (Strong Buy) rating: Novo Nordisk A/S (NVO), Roche Holding AG (RHHBY), and Neurocrine Biosciences, Inc. (NBIX).

JNJ shares were trading at $173.98 per share on Thursday afternoon, up $1.53 (+0.89%). Year-to-date, JNJ has gained 3.70%, versus a -16.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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