I consider Johnson and Johnson’s (NYSE:JNJ) share price as a Buy.
Reviewing JNJ’s performance, earnings and key metrics and future-looking financial forecasts I consider Johnson & Johnson as deserving of a Buy investment grade. JNJ’s mid-teens forward FY2022 P/E ratio isn’t too demanding, and I am positive regarding the company’s outlook for the near-term due to its decision to segregate its slower-growth and lower-margin consumer health division.
What were Johnson & Johnson Stock Earnings?
Johnson & Johnson announced the Q4 results for 2021 on January 25, 2022 just before the market opened.
It’s not surprising that JNJ’s latest quarterly financial results were the subject of much attention considering the company’s position as a market leader in the health care sector. JNJ is described as a company “engaged in the research and development, manufacture and sale of a broad assortment of products in the health care field” in its filing for the 2021 10-K. It also describes it as “the world’s largest and most broad-based health care company” on its website for corporate purposes.
Johnson &Johnson’s shares performed reasonably well post-results announcement. JNJ’s share price rose by +6.0 percent from $162.97 at the time of January 24, 2022 to $172.77 at the time of February 2, 2022. The firm’s solid price increase following the publication of its recent results is backed by its performance in Q4 2021 and its forward-looking guidance for 2022.
According to its Q4 2021 earnings release press conference, Johnson and Johnson’s non-GAAP adjusted earnings per share increased by +10.4% YoY and +14.5 percentage YoY in the range of $24.8 billion and $2.13 according to. Also, JNJ’s bottom line in the quarter ended on a +0.5% higher than the market consensus’ projection.
The revenue from JNJ’s fourth quarter of 2021 came in -1.9 percent below the consensus of analysts on the sell side estimate, the mid-point of the company’s 2022 revenue estimate of $99.65 billion was found to be +2.0 percent more than the market had predicted. More importantly, Johnson & Johnson’s mid-point guidance for EPS for 2020 was $10.50, which was +1.7 percent more that Wall Street analysts’ expectations.
In the following section, I will highlight two important metrics that investors should be aware of as part of Johnson & Johnson’s most recent financial results.
JNJ Stock Key Metrics
I think that the primary metrics for JNJ are its sales expansion by segment and profit margins.
There is a distinct divergence regarding the financial performance of the Johnson & Johnson’s business segments for Q4 2021 and FY 2021. For the last fiscal year JNJ’s pharmaceutical and medical device businesses posted high growth rates of double-digits on top line. Contrastingly, its consumer health business has only single-digit revenue growth rates in both the fiscal year as well as the most recent quarter. It is also notable that the consumer health segment has the lowest pre-tax profit margins of the three segments in the fourth quarter of 2021 and FY 2021 also.
It is evident that Johnson &Jones’ consumer health segment has a negative impact on the overall growth of revenue, and it is also its smallest of the three segments. As such, it is logical for JNJ to differentiate the consumer health sector from the other, more rapidly growing companies within the company, and this is exactly the way Johnson & Johnson is doing.
On November 12 2021 the Seeking Alpha news article cited a Wall Street Journal piece which highlighted that JNJ “will split its medical device and drug business from its consumer goods group, and create two public companies.” It is noteworthy that Johnson & Johnson emphasized at the JPMorgan (JPM) 40th Annual Healthcare Conference that the two goals of the planned separation of the consumer health segment included “accelerating performance that we believe it is possible to achieve using an appropriate strategy” and “unlocking the value of shareholders, as many of these deals have before.”
According to a report published the website The Pharma Letter, which describes it a source of “business information about the global biotechnology, pharmaceutical and generic industries”, Johnson & Johnson’s consumer health business may fetch a valuation in excess of $45 billion. This amounts to about 10% of the company’s market capitalization, which makes this proposed value unlocking transaction an extremely significant one. Johnson & Johnson guided at JPMorgan’s 40th Annual Healthcare Conference that the consumer health business’ separation is expected to occur “towards 2023’s end.”
In addition, Johnson & Johnson is coping well despite inflationary cost pressure, and this is evident in its quarterly profit margins of Q4 2021, as according to the chart below. JNJ’s gross margin margin and non-GAAP adjusted net profit margins grew with +270 basis point and +80 basis points YoY 67.9 percentage and 22.9 percent, respectively, for the latest quarter.
Johnson and Johnson’s Q4-2021 Profit and Loss Statement
In its Q4 2021 earnings call Johnson & Johnson explained why it is still able to deliver profits growth in the fourth quarter. The company said that “given the scale of our business it is our belief that we can constantly improve the structures, our operating models to leverage this P&L (Profit & Loss).” Other segment-specific factors were optimal mix of sales as well as positive leverage in the operating pharmaceutical industry and a normalization of production operations (following interruptions to production in the 2020 year) for the medical device business.
In the final analysis, a study of Johnson &Johnson’s segmental sales growth and profitability for Q4 2021 provides a positive outlook for JNJ. The profit margins of the company have increased year-over-year in Q4 2021, despite the negative impact of inflation. Additionally, JNJ is aware of the difference in revenue growth rates and profitability between the consumer health business and its two other segments, and has proposed an end to the problem.
What’s the JNJ Stock’s Future?
JNJ is forecasted to perform well this year.
Johnson & Johnson has set its sights on an increase of a single digit in its top line and its bottom line during FY 2022. This is aligned with the sell-side analysts’ consensus fiscal 2022 financial JNJ stock forecast, which point to a +6.2 percentage increase in the company’s revenue and +7.4 percentage growth in its normalized earnings per share.
As I said in the preceding article, JNJ has been able to significantly offset the negative effect of inflation in the fourth quarter of 2021 in order to realize margin growth. This gives me confidence that Johnson & Johnson can deliver on its +50 basis points operating profit margin margin expansion forecast and achieve a single percent growth on its net profit in line with what it has planned and what investors expect.
Looking ahead into 2023, and further “the future Johnson & Johnson”, which JNJ calls the new company , which includes the medical devices and pharmaceutical businesses, should be able to generate relatively faster top line expansion and greater profit margins, without the pressure from the health of consumers segment. This is the most important reason for JNJ’s shares to rise.
Does JNJ Shares A Sell or Buy Or Hold?
JNJ stock is an investment that I consider to be a Buy. Johnson & Johnson currently trades at 15.7 times consensus forward normalized P/E as per S&P Capital IQ, and this is reasonably attractive when you consider its history of ROEs that exceed 30% and consistent single-digit growth rates on top line. Also, JNJ is now valued by the market at less than its five-year mean consensus forward next twelve months’ normalized P/E of approximately 16.8 times. I think that the separation of the consumer health business by 2023 could serve as an incentive to revise the valuation of JNJ’s shares. This supports my Buy rating for the company.
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