Is Johnson & Johnson’s Valuation High Compared to Its Peers?



Johnson & Johnson’s valuation

Headquartered in New Brunswick, New Jersey, Johnson & Johnson (JNJ) is one of the largest pharmaceutical and healthcare companies. To learn more about the company, read Investing in Johnson & Johnson: What You Should Know. This series covers major factors and the segment-wise performance of products for a better understanding of each of Johnson & Johnson’s growth drivers.

From an investor’s point of view, the two best valuation multiples used for valuing companies like Johnson & Johnson are the forward PE (price-to-earnings) and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples—considering the relatively stable and visible nature of their earnings.

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Forward PE

PE multiples represent what one share can buy for an equity investor. As of August 30, 2016, Johnson & Johnson was trading at a forward PE multiple of ~17.2x—compared to the industry average of 16.6x. Over the past year, the company’s forward PE multiple has traded in the range of 14.4x–18.2x. Its peers such as Pfizer (PFE), Merck & Co. (MRK), and Eli Lilly & Co. (LLY) have forward PE multiples of 13.6x, 16.5x, and 20.0x, respectively.

Forward EV-to-EBITDA

On a capital structure neutral and excess cash-adjusted basis, Johnson & Johnson currently trades at ~11.9x. This is lower than the industry’s average of ~12.2x. Its peers such as Pfizer, Merck & Co., and Eli Lilly & Co. have forward EV-to-EBITDA multiples of 10.3x, 10.4x, and 14.0x, respectively.

Analysts’ recommendations

According to the data on August 29, 2016, Johnson & Johnson’s stock value rose by over 29.6% during the last 12 months. Analysts estimate that the stock has the potential to return ~6.9% over the next 12 months. Analysts’ recommendations show a 12-month target price of $128.18 per share—compared to the last price of $119.92 per share as of August 29, 2016. Also, 44% of the analysts recommend a “buy” and 56% of the analysts recommend a “sell,” according to Bloomberg’s consensus. Changes in analysts’ estimates and recommendations are based on changing trends in the stock price.

Investors can consider ETFs like the iShares Global Healthcare ETF (IXJ). IXJ holds 8.1% of its total assets in Johnson & Johnson in order to divest risk.


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