We believe that the forward PE (price-to-earnings) and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples are the two best valuation multiples to use when valuing Johnson & Johnson (JNJ) and other large pharmaceutical companies, given the relatively stable and visible natures of their earnings.
PE multiples are widely available and represent what one share can buy for an equity investor. EV-to-EBITDA multiples, on the other hand, are capital structure neutral.
The above chart shows Johnson & Johnson’s PE and EV-to-EBITDA multiples for the last six months.
On January 26, 2017, the company was trading at a forward PE of ~15.8x. Based on the last five years’ multiple range, JNJ’s current valuation is neither high nor low. Its PE has ranged from ~11.5x to ~18.4x.
Johnson & Johnson’s valuation multiple was opposite the industry trend until mid-2013, but it has since followed the trend. Whether the healthcare sector’s forward PE rises or falls, JNJ will definitely be affected.
On a capital-structure-neutral and excess-cash-adjusted basis, JNJ is currently trading at ~10.7x, lower than the industry average of ~11.1x. Pfizer, Merck & Co., and Eli Lilly have forward EV-to-EBITDA multiples of 9.4x, 9.5x, and 13.0x, respectively.