J&J-Johnson & Johnson: Remaining A Buy Despite Remaining Risks

Core Viewpoint - Johnson & Johnson has experienced a decline of approximately 9% over the last 10 months, underperforming compared to the S&P 500, which increased by 23% in the same period. The stock is now at its lowest valuation in at least 35 years, prompting a reevaluation of its investment potential [1][2]. Valuation Multiples - The current price-earnings (P/E) ratio for Johnson & Johnson is 9.7, the lowest in the last five years and potentially the lowest in 35 years, indicating undervaluation [2]. - The price-free-cash-flow (P/FCF) ratio stands at 20, slightly below the five-year average of 22.44, suggesting a hold rather than a buy at this point [3]. Quarterly Results - For Q1 2024, Johnson & Johnson reported sales of $21,383 million, a 2.3% increase year-over-year from$ 20,894 million in Q1 2023. Diluted earnings per share improved from a loss of $0.19 to$ 2.20 [4]. - Adjusted earnings per share rose by 12.4% year-over-year, from $2.41 in Q1 2023 to$ 2.71 in Q1 2024 [4]. Guidance - Management expects adjusted operating sales to grow between 5.5% and 6.0%, with reported sales projected around $88 billion, indicating about 5% top-line growth. Adjusted earnings per share are anticipated to be between$ 10.57 and $10.72 [5][6]. Segment Results - The MedTech segment reported$ 7,821 million in revenue, reflecting a 4.5% year-over-year growth, impacted by fewer selling days [8]. - The Innovative Medicines segment generated $13,562 million in revenue, with a 1.1% year-over-year growth. Excluding the COVID-19 vaccine impact, operational sales grew by 8.3% [9][10]. Growth Strategies - Johnson & Johnson has been engaging in share buybacks, reducing outstanding shares from approximately 3 billion to 2.43 billion over the last 20 years, contributing about 2% annually to the bottom line [11][12]. - The company has made significant acquisitions, including Shockwave Medical for$ 13.1 billion and Proteologix for $850 million, aimed at enhancing its position in cardiovascular intervention and oncology [12]. Litigation Risks - Johnson & Johnson faces over 50,000 lawsuits related to its talc products, with a proposed$ 6.5 billion settlement to resolve most claims. The company has set aside $13.7 billion in reserves for these legal challenges [13]. Intrinsic Value Calculation - Based on a free cash flow of$ 18.23 billion and a conservative growth estimate of 6%, the intrinsic value of Johnson & Johnson is calculated at $187.55, indicating the stock is undervalued at its current trading price of$ 146 [15][16]. Upcoming Earnings - Analysts have mixed sentiments regarding the upcoming Q2 earnings, with more revenue revisions upward but more downward revisions for earnings per share, indicating a bearish outlook [17]. Conclusion - Johnson & Johnson is considered a "Buy" for long-term stability and consistent dividend payments, although short-to-mid-term risks of lower stock prices exist. The company is viewed as a bond-like investment, providing steady returns [18].