Why J&J’s Fallen Stock Is Still Too Pricey

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Johnson & Johnson's (JNJ) stock has had a terrible 2018, with shares falling by nearly 7%, while the S&P 500 has dropped by just about 1%. To make matters worse shares of the pharmaceutical giant now look expensive as the earnings and revenue growth outlook remains weak. Meanwhile, an analysis of the technical chart suggests shares could fall by nearly 11%, from its current price around $129.40.

An article in Investopedia back in January noted that Johnson & Johnson could rise to $160 should the company see multiple expansion driven by earnings growth. But earnings multiples have contracted since then as stock prices have dropped. The stock has fallen 12% from its January high, after reporting quarterly results that were aided by a weaker currency and lower tax rate. 

JNJ data by YCharts

Expensive Relative To The Market

Shares of Johnson & Johnson aren't cheap, trading at trading at 15.2 times 2019 earnings of $8.54 per share. The S&P 500 currently trades around 16.5 times 2019 earnings estimates of $160.77, according to S&P Dow Jones Indices, giving the company a slight discount to the market. But the S&P 500 is expected to see its earnings grow by over 10% from $146.13 per share in 2018. Johnson & Johnson is expected to see its earnings rise by only 5.75% in 2019, from $8.07 in 2018. Adjusting for growth, Johnson & Johnson trades with PEG ratio of 2.65 versus the S&P 500 PEG ratio of 1.64. 

Expensive Relative to Peers

Of the top 25 companies in the Health Care Select Sector SPDR ETF (XLV), the average one-year forward P/E ratio is 16.58. But earnings are forecast to rise on average for the 25 companies by 12%, while revenues are seen increasing by 6% on average. Johnson & Johnson is expected to see revenue growth of only 4%, putting both earnings and revenue growth below average. In fact, of the seven companies forecast to see less than 6% earnings growth, Johnson & Johnson carries the highest one-year forward earnings multiple. 

JNJ PE Ratio (Forward 1y) data by YCharts

Technicals Weak

The technical chart is damaged as well after the stock fell below a nearly two-year technical uptrend, dating back to September 2016. The next area of technical support comes closer to $115, a decline of more than 11%. 

Analysts Mixed

Of the 25 analysts that cover Johnson & Johnson, according to Ycharts, only 48% have a buy or outperform rating, while 52% have a hold rating or worse on the shares. But the same analysts do see the stock rising in 2018, with an average price target of $147.50, a rise of 14.3% from its current price. 

With analysts forecasting slow earnings and revenue growth and a high earnings multiple compared to that of the broader market and its peers, shares of Johnson & Johnson may have a tough road ahead. But the company could always change the narrative when it next reports its results on April 17. 

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.