Trader Take: J&J (JNJ)
There has been some interesting pricing action of late in DJIA component Johnson & Johnson (NYSE: JNJ) as shares are right at 52-week highs after getting above a 4-year trading band. A trader we speak with frequently has keyed in on this to show where he thinks this can rise to or where it could settle in if gains aren’t sustained.
Today’s analysis is brought by Alan J. Brochstein, CFA, of AB Analytical Services which provides research and consulting to institutional investment managers and also provides services to individual investors through www.InvestByModel.com. Here’s Alan’s take below:
Johnson & Johnson (JNJ), the $194 billion market cap Healthcare giant, moved to the top of its almost 4 year trading range, setting a new 52-week high of $69.25 on Thursday and closing above 69 on Friday.
The stock has improved slightly since year-end and about 13% over the past year, in both cases substantially outperforming the market (see the relative performance in the graph above – the black line). The company also pays a dividend and yields 2.7%, which is a bit better than that of the S&P 500. As the bottom panel shows, the growth in the stock price has been due almost entirely to earnings growth, as the PE multiple has remained below 15. The chart below highlights the PE over the past decade:
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The current PE of 14.9 is about as low as it has been in the past decade (actually since 1994). Note that the stock price has been consolidating as earnings (the green line) have continued to grow. The pattern of higher lows and a constant resistance level (ascending continuation triangle) usually yields a breakout, so keep your eye on JNJ here. I don’t personally own it, but I did recently include it in my Conservative Growth/Balanced Model Portfolio that I launched in Mid-July. Besides the low valuation and the nice chart pattern, investors can take encouragement from the 35+ year history of raising dividends, the very strong balance sheet (net debt of just $300mm) and a strong business model. Many investors fail to appreciate how “unPharma” the company actually is: JNJ earns less than ½ its profits from drugs. While it is the largest segment, the medical devices segment contributes almost as much, while the Consumer Products segment kicks in about 10%. JNJ is extremely balanced. In fact, its two largest drugs account for less than 11% of sales. The company is not plagued as much as its peers by patent expiration issues.
How high can JNJ go? I believe that the company can attain a 17 PE over the next year, which would yield a price of 83 and return about 23% including dividends. Not bad for a company that dates back to the 19th century! I think that if the stock fails to break out of the range, it could test 63, perhaps 59 in a really bad market. Something tells me, though, that this is a classic consolidation of a very long-term up-trend that should yield continued gains for investors.
Alan J. Brochstein
July 27, 2008
TRADER DISCLOSURE: NO DIRECT POSITION CURRENTLY