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How Does Johnson & Johnson’s Valuation Compare to Its Peers?

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Johnson & Johnson’s valuation

Headquartered in New Brunswick, New Jersey, Johnson & Johnson (JNJ) is one of the country’s largest pharmaceuticals and healthcare companies. With an operational presence in more than 60 countries, the company supplies products in more than 200 countries.

The chart below compares Johnson & Johnson’s stock price, price-to-earnings multiple, and EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple. This series covers the major factors and segment-wise performance of the company’s products for a thorough understanding of each of these drivers.

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Forward PE

From an investor’s point of view, the two best valuation multiples used to value companies like Johnson & Johnson are the forward PE multiple and the EV-to-EBITDA multiple. These multiples consider the relatively stable and visible nature of the company’s earnings.

PE multiples represent what one share can buy for an equity investor. On December 7, 2016, Johnson & Johnson was trading at a forward PE multiple of ~15.7x, compared to the industry average of 15.5x. Over the last year, the company’s forward PE has traded in the range of 14.4x–18.2x.

Among Johnson & Johnson’s competitors, Pfizer (PFE), Merck (MRK), and Eli Lilly (LLY) have forward PE multiples of 12.1x, 15.5x, and 17.3x, respectively.

Forward EV-to-EBITDA

On a capital structure–neutral and excess cash–adjusted basis, Johnson & Johnson (JNJ) currently trades at a forward EV-to-EBITDA multiple of ~10.9x, compared to the industry’s average of ~10.6x.

Among its competitors, Pfizer (PFE), Merck (MRK), and Eli Lilly (LLY) have forward EV-to-EBITDA multiples of 8.8x, 9.4x, and 12.4x, respectively.

Analyst recommendations

According to its December 7, 2016, data, Johnson & Johnson’s (JNJ) stock has risen more than 8.5% over the last 12 months. Analysts estimate that the stock has the potential to return ~12.7% over the next 12 months.

Analysts’ recommendations show a 12-month target price of $126.26 per share compared to its price per share of $112.06 on December 6, 2016. Also, 39% of the analysts recommended a “buy,” and 61% of the analysts recommended a “sell.” Changes in analysts’ estimates and recommendations are based on changing trends in the stock price.

Investors can gain broad-based exposure to Johnson & Johnson via the iShares Global Healthcare ETF (IXJ), which holds 8.0% of its total assets in JNJ.

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