I consider Johnson and Johnson’s (NYSE:JNJ) share price as a Buy.
In analyzing JNJ’s most recent earnings, key metrics and the financial forecasts for the future, I deem Johnson & Johnson as deserving of a Buy investment rating. JNJ’s midteens forward FY 2022 P/E ratio isn’t too demanding and I am confident regarding the company’s outlook for the near-term considering the decision to separate its less-expanding and less profitable consumer health division.
What were Johnson & Johnson Stock Earnings?
Johnson & Johnson announced the Q4 2021 results of the company on January 25, 2022 before the market opened.
It’s natural that JNJ’s most recent quarter-end financial results drew attention, due to the company’s leadership position in the healthcare industry. JNJ is described as an enterprise “engaged in of research and development and the as well as the manufacture and sales of a diverse assortment of products in the healthcare field” in its filing for the 2021 10-K. It also describes JNJ as “the world’s largest and most wide-ranging healthcare company” on its corporate website.
Johnson &Johnson’s shares performed quite well after the results announcement. The JNJ share price climbed by +6.0 percentage from $162.97 on the 24th of January, 2022, to $172.77 on February 2, 2022. The good price increase following the announcement of its latest results is supported by the Q4 performance of 2021 and the JNJ stock forecast for 2022.
In its Q4 2021 announcement of earnings, Johnson and Johnson’s revenues and non-GAAP-adjusted earnings per share increased by +10.4 percent YoY and +14.5 percent YoY, for $24.8 billion, and $2.13, respectively. Additionally, JNJ’s bottom line for the fourth quarter was +0.5% higher than the market consensus estimate.
While JNJ’s revenue for Q4 2021 totaled -1.9 percentage points lower than the sell-side analysts’ consensus estimate, the mid-point of the company’s revenue 2022 forecast of $99.65 billion turned out to be +2.0 percent better than the market had predicted. In addition, Johnson & Johnson’s mid-point guidance for EPS for FY 2022 stood at $10.50 and was +1.7% higher that Wall Street analysts’ expectations.
In the next section I’ll highlight two metrics that investors must be aware of as part of Johnson & Johnson’s latest financial results.
JNJ Stock Key Metrics
I believe the most important metrics for JNJ are its sales growth by segment and its profit margins.
There is a significant difference with regard to the performances of Johnson and Johnson’s business units for the quarter ending in 2021 and the year 2021. For the last fiscal year, JNJ’s medical devices and pharmaceutical businesses posted high growth rates of double-digits on top line. Contrastingly, its consumer health business has only one-digit growth in revenue for both the current financial year and the recent quarter. It is also noteworthy that the segment focusing on consumer health has the lowest pre-tax profit margins of all three segments in Q4 2021 and FY 2021, too.
It is evident that Johnson & Johnson’s consumer health division is a major obstacle to the company’s overall revenue growth as well as being its smallest of the three segments. It is reasonable to JNJ to segregate its consumer health division from the other more rapid-growing companies within the company, which is precisely what Johnson & Johnson is doing.
On November 12 2021, a Seeking Alpha news article cited an article from the Wall Street Journal piece which noted the fact that JNJ “will break up its drug and medical devices business from its consumer goods group, resulting in two publicly traded companies.” Notably, Johnson & Johnson emphasized at the JPMorgan (JPM) 40th Annual Healthcare Conference that the two objectives of the planned separation of the consumer health division were “accelerating performance that we believe that we can achieve with the right model” and “unlocking the value of shareholders, as many of these deals have previously.”
According to an article published on The Pharma Letter that calls itself a provider of “business information about the global biotechnology, generic, and pharmaceutical industries” Johnson &Jones’ consumer health division could get a price in excess by $45 billion. This is equivalent to approximately 10% of JNJ’s market capitalization, making this value unlocking acquisition important. Johnson & Johnson guided at JPMorgan’s 40th Annual Healthcare Conference that the separation of the consumer health business should happen “towards the end of 2023.”
Separately, Johnson & Johnson is doing well despite the rising cost pressure, and this is reflected in the company’s Q4 2021 profit margins, as in the graph below. JNJ’s gross margin margin and Net profit adjusted to non-GAAP margin increased in a 270-basis point increment and +80 basis points YoY , to 67.9 percent and 22.9 percent, respectively, in the most recent quarter.
Johnson & Johnson’s Q4 2021 Profit and Loss Report
On the company’s Q4 2021 earnings conference call, Johnson & Johnson explained why it is still able to deliver an increase in profit during the fourth quarter, stating that “given the size of our company, it is our belief that we can always improve our infrastructure, our operating model to increase leverage in our P&L (Profit & Loss).” The other specific segment aspects included a proper mix of sales with positive operational leverage to the pharmaceutical industry as well as a return to normal production activities (following interruptions that occurred in the year 2020) to the medical devices business.
In the end, a summary of Johnson &Johnson’s segmental sales growth and profit margins for Q4 2021 provides a positive outlook for JNJ. The margins for profit of the company have increased year-over-year in Q4 2021, despite the negative impacts of inflation. Also, JNJ is aware of the disparity in revenue growth rates and profitability of the consumer health segment and its other two segments, and has proposed a separation to tackle the problem.
What is JNJ’s Stock’s Future?
JNJ is predicted to do exceptionally this year.
Johnson & Johnson has set its sights on an impressive single-digit growth in both its top and its bottom line during FY 2022. This is aligned with the sell-side analysts’ fiscal 2022 consensus estimates for financials, which point to an +6.2% increase in the company’s revenue and +7.4 percent growth in its normalized profits per share.
As I mentioned in the previous article, JNJ has been able to significantly offset the negative impact of inflation in Q4 2021 and achieve margin expansion. This makes me confident of the fact that Johnson & Johnson can deliver the +50 basis point operating margin margin expansion guidance and achieve a single percent growth in its bottom line in line with what it guided for and what the market expects.
Looking ahead to 2023 and beyond “the brand new Johnson & Johnson”, which JNJ calls the new company comprising medical and pharmaceutical companies, is expected to create a relatively quicker top line growth and higher profit margins without the burden of the consumer health segment. This could be the main driver for the shares of JNJ.
Is JNJ Shares A Sell or Buy or Hold?
JNJ stock is an investment worth buying in my view. Johnson & Johnson currently trades at a 15.7 times the consensus forward normalized P/E multiple as in S&P Capital IQ data and this is reasonably attractive when you consider its history of ROEs that exceed 30% and its steady single-digit top line growth rates. Additionally, JNJ is now valued by the market at less than its five-year mean forward consensus next 12 months’ normalized P/E, which is around 16.8 times. I believe that the dissolution of the consumer health division by 2023 could act as a catalyst to re-rate JNJ’s shares. This is in line with my”Buy” rating for the stock.