A look at Johnson & Johnson’s valuation
Headquartered in New Brunswick, New Jersey, Johnson & Johnson (JNJ) is one of the largest pharmaceutical companies, with its products sold in over 200 countries worldwide. Johnson & Johnson reported an EPS (earnings per share) of $1.83 and revenue of $18.8 billion in 2Q17.
The above chart shows Johnson & Johnson’s revenue and EPS over the last few quarters. In 3Q17, Johnson & Johnson is expected to report revenue of $19.3 billion, 8.2% growth from 3Q16.
Forward price-to-earnings multiple
The price-to-earnings (or PE) multiple represents what one share can buy for an equity investor. On August 25, 2017, Johnson & Johnson was trading at a forward PE multiple of ~17.6x, compared with the industry average of 16.5x. Competitors such as Merck and Co. (MRK), Eli Lilly and Company (LLY), and Bristol-Myers Squibb (BMY) have forward PE multiples of 15.4x, 17.9x, and 18.6x, respectively.
Forward EV-to-EBITDA multiple
On a capital-structure-neutral basis, Johnson & Johnson has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of ~13.3x, compared with the industry average of ~13.0x. Merck and Co., Eli Lilly and Company, and Bristol-Myers Squibb have multiples of 11.5x, 13.4x, and 15.5x, respectively.
Johnson & Johnson’s stock value has risen by over 11.9% over the last 12 months. Analysts estimate that the stock price will rise ~3% over the next 12 months. Analysts have given a 12-month targeted price of $136.89 per share, compared with $132.89 per share on August 24, 2017. Also, of the 22 analysts tracking Johnson & Johnson, ten analysts recommend “buy,” ten recommend “hold,” and two recommend “sell.” The consensus rating for Johnson & Johnson is 2.6, which is a moderate “buy” for value investors.
To divest company-specific risks, investors could consider the Health Care Select Sector SPDR ETF (XLV) which has an 11.9% exposure to Johnson & Johnson. XLV also holds 5.6% of its total assets in Merck and Co., 3.2% in Bristol-Myers Squibb, and 2.5% in Eli Lilly and Company.