Johnson & Johnson Stock Still Has Some Room to Grow

Company’s Description Johnson & Johnson is engaged in the research and development, manufacturing and marketing of a range of healthcare products. The company's R&D centers are located in the USA, Belgium, Brazil, Canada, China, France, Germany, India, Israel, Japan, the Netherlands, Singapore, Switzerland and the United Kingdom. Johnson & Johnson has over 230 operating companies doing business around the world. The company employs over 132 thousand employees. As of 2020, the lion's share of Johnson & Johnson is generated domestically (52%), about a quarter of revenue comes from Europe (23%) and about a fifth is generated in Asia and Africa (18%). The company operates in three key segments: consumer, pharmaceutical and medical equipment. 55% of the revenue comes from the pharmaceutical segment, about a third is generated from the medical equipment segment (28%), and the other 17% comes from the consumer segment. Pharmaceutical segment The pharmaceutical segment focuses on five therapeutic areas, including: Immunology (rheumatoid arthritis, inflammatory bowel disease, psoriasis and lung disease); Infectious diseases and vaccines (human immunodeficiency virus (HIV), hepatitis, respiratory infections, tuberculosis and vaccines); Neurology (Alzheimer's disease, mood disorders and schizophrenia); Oncology (prostate cancer, hematological malignant neoplasms and lung cancer); Cardiovascular and metabolic diseases (thrombosis and diabetes). Consumer segment The consumer segment includes a range of products used in childcare, as well as oral care, skin care, over-the-counter pharmaceuticals and women's health. The category of children's products includes the JOHNSON'S product line. The Oral Care category includes the LISTERINE product line. Brands in the cosmetics category include the AVEENO, CLEAN & CLEAR, DABAO, JOHNSON'S Adult, LE PETITE MARSEILLAIS, NEUTROGENA, RoC and OGX product lines. The over-the-counter drug category includes the TYLENOL family of acetaminophen products; SUDAFED - remedies for colds, flu and allergies; allergy products BENADRYL and ZYRTEC. Wound care brands include BAND-AID and the NEOSPORIN First Aid product lines. Medical equipment The medical device segment includes a range of products used in orthopedics, surgery, cardiovascular health, diabetes and vision care. The segment's products are used primarily in professional fields by doctors, nurses, hospitals, ophthalmologists and clinics. The segment includes: orthopedic products, products for general surgery, biosurgical, endomechanical and energy products; electrophysiological products for the treatment of cardiovascular diseases; sterilizing and disinfecting agents to reduce surgical infection; means to monitor blood glucose levels; insulin delivery devices and disposable contact lenses. It is important to note that the pharmaceutical segment is playing an increasingly significant role in Johnson & Johnson's operations. In 2013 this segment had approximately the same weight in the share of the company's revenue as the medical equipment segment. However it has been the fastest growing segment since then. On the contrary, the share of medical equipment is declining. Financials Pharmaceutical segment The most important segment of Johnson & Johnson - judging by the 55% revenue share - ended the year of 2020 with a stable growth of 8.2% and amounted to $ 45.572 billion. The largest sector of the segment - immunology - grew by an identical 8.2%. One of the most important products of Johnson and Johnson - STELARA (treatment of plaque psoriasis), showed superb results. In 2020 its sales increased by 21.1% YoY. Hence, STELARA brought in $ 7.70 billion. Revenue from the second largest drug in the sector REMICADE, on the contrary, fell by 13.8% YoY to $ 3.74 billion. The oncology sector grew by 15.8% YoY as of December 2020. The two largest drugs in the sector - DARZALEX and IMBRUVICA - showed rapid growth: 40.3% and 21.5% YoY ($ 4.19 billion and $ 4.12 billion, respectively). According to the company’s guidance, a stable growth of this segment is expected to continue in 2021. Medical equipment Operating sales of medical devices decreased 11.4% in 2020 to $ 22.959 billion. The decline was mainly driven by the negative impact of the COVID-19 pandemic and the associated postponement of medical procedures. Thus, revenue from sales of products of the orthopedic sector fell by 12.3% YoY, and the surgical sector by 12.8%, amounting to $ 7.76 billion and $ 8.23 ​​billion, respectively. This segment is expected to continue experiencing some downturn in the short term but remains attractive in the second half of 2021 as well as in the long term. Consumer segment Sales in the consumer segment grew by 3.0% YoY and brought the company $ 14.053 billion. This segment will develop at a moderate pace, especially from the beginning of the second half of 2021 i.e., as soon as life returns to its previous course and the need for personal care and health products grows. The general trend in the development of e-commerce, in the field of everyday goods, is also a contributing positive factor. The largest owners of the company are The Vanguard Group (8.66%), State Street Global Advisors (5.47%) and BlackRock Institutional Trust Company (4.70%). Johnson & Johnson’s Strengths  Stability A whole range of characteristics of this company boil down to one thing - security. Johnson & Johnson is distinguished by a non-cyclical nature of the business and low sensitivity to economic cycles, as well as diversified sources, and geography of income (the largest pharmaceutical company), and a large portfolio of products. Johnson & Johnson is one of only two AAA-rated companies in the entire US market. According to this rating, now, the company has a lower chance of default than US government bonds. One of the key indicators of the company's credit risk is its net debt / EBITDA ratio. For some time until 2017, the company had a negative ratio. However, In 2017 the acquisition of the Swiss company Actelion, which specializes in the production of drugs for the treatment of rare diseases, took place. The deal was worth $ 30 billion in cash, making it the JNJ’s largest purchase in the history. Despite this, the company still has the lowest net debt to EBITDA ratio (0.25x) among its competitors. Dividends This dividend aristocrat has been raising its dividend payments for 58 years in a row now. Despite the challenging 2020, the company has enough liquidity to continue paying dividends in the future. Vaccine against COVID-19 The Johnson & Johnson vaccine has several competitive advantages. Firstly, it only takes one injection for its action, not two. Secondly, there is an advantage in terms of logistics and storage. This vaccine can be stored at 2-8 ° C. A total of 1.27 billion doses were ordered as of mid-December 2020, each of which is expected to cost about $ 10. It’s partly for this reason that company’s revenue for 2021 is forecast to grow by more than 10%. It is worth noting that Johnson & Johnson has an extensive network of suppliers and contacts due to its global presence. Despite not the highest efficiency (66%), all the above makes the vaccine from this company an in demand product, especially in the developing countries around the world. Aging population It is projected that by 2050 the number of people over the age of 60 worldwide will double and reach 2 billion. People who have reached retirement age spend more money on medicines than people under 40. Further, statistics show that the 55–75 age cohort owns the largest amount of net assets, and this makes its members important economic agents. There is no doubt that these trends benefit a company like Johnson & Johnson, whose products are often used by older people. Risks Potential for Litigations As the largest pharmaceutical company, Johnson & Johnson undergoes many quality-related audits. The company has been the subject of a fair amount of litigation over the past few years. As can be assumed, their settlement requires tens or even hundreds of millions of dollars. Should many of them happen in the foreseeable future, the company may face some unnecessary need to waste their liquidity. Regulatory risk and government pressure Like the entire healthcare industry, Johnson & Johnson is potentially subject to changes in legislation regarding certain procedures or drugs. What's more, President Biden has pledged to make drugs more affordable for Americans, which could lead to lower revenues for some drugs. Valuation  To value Johnson & Johnson’s stock, I used two methods - the discounted cash flow (DCF) method and the comps method. For the DCF valuation, I forecast cash flows up to 2025, making moderately conservative revenue forecasts. Here’s a short list of the factors that contribute to a more than 10% growth in 2021: the recovery of the global economy, the release of the vaccine against COVID-19, promising candidate drugs awaiting FDA approval, as well as potential acquisitions, due to high liquidity coupled with low debt obligations. A further forecast of revenue growth, starting from 2023, at 3.5% is due to the conservative assumption that growth rates will remain the same or slightly decrease (average growth from 2011 to 2023 - 3.65%).   2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E Revenue ($M) 76 450 81 581 82 059 82 584 91 536 95 680 99 029 102 495 106 082 Revenue Growth 6.7% 0.6% 0.6% 10.8% 4.5% 3.5% 3.5% 3.5%   2020 2021E 2022E 2023E 2024E 2025E   Terminal Value FCFF ($M) 20 000 21 265 22 228 23 006 23 811 24 644 582 320 Discount Rate 1.03 1.09 1.16 1.23 1.31 1.35 Discounted FCFF ($M) 20 635 20 310 19 794 19 291 18 801 443 213   WACC     6,20% Debt $B 35 Equity $B 429,1 Equity Weight 92,46% Debt Weight 7,54% Cost of Equity 6,64% Cost of Debt 0,9% Income Tax 17% Thus, the fair value, according to DCF, is $ 205.90. For a more accurate assessment, I also used the multiples approach.     Company Name   Market Cap($M)   Price / EPS (NTM)   Price/S (NTM)   EV/EBITDA (NTM)   EV/S (NTM)   Johnson & Johnson   448 256   17.25     4.77   13.32   4.87 Pfizer 224 019 10.95 3.20 9.29 3.57 Eli Lilly and Co 188 170 23.86 6.84 20.61 7.32 Merck & Co 198 234 11.51 3.72 9.55 4.18 Abbvie 205 641 8.85 3.59 9.41 4.91 Amgen 144 431 14.95 5.48 10.95 6.32 Novartis 220 368 13.73 4.18 13.25 4.83 Median     12.62   3.95   10.25   4.87 Target P/E (NTM) 12.62 Forecasted EPS 2021 9,58 Fair Value (P/E) $ 120.90 Forecasted Revenue 2021 ($M) 91 438 Target Price/Revenue (NTM) 3.95 Fair Value (Price/Revenue) $ 135.82 Forecasted EBITDA 2021 ($M) 33 157 Target EV/EBITDA (NTM) 10.25 Fair Value (EV/EBITDA) $ 127.64 Target EV/Revenue ($M) 4.87 Fair Value (EV/Revenue) 167.25 The equally weighted fair value according to comps method is $137.90. So, if we give 30% weight to the comps method and 70% to the DCF method, we’ll have a fair price for Johnson & Johnson over the next 12 months of $188.68, which means JNJ has a potential upside of about 11% from today’s price of $170.

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ArtemyShamshukov

May 16, 2021

-3.84%

Change % Since Posting

170.22

Price When Posted

-6.53

Change Since Posting

JNJ

Johnson & Johnson

163.69

0.52
0.32%
Current Price

Johnson & Johnson Stock Still Has Some Room to Grow

bullish

Company’s Description

Johnson & Johnson is engaged in the research and development, manufacturing and marketing of a range of healthcare products. The company's R&D centers are located in the USA, Belgium, Brazil, Canada, China, France, Germany, India, Israel, Japan, the Netherlands, Singapore, Switzerland and the United Kingdom. Johnson & Johnson has over 230 operating companies doing business around the world. The company employs over 132 thousand employees.

As of 2020, the lion's share of Johnson & Johnson is generated domestically (52%), about a quarter of revenue comes from Europe (23%) and about a fifth is generated in Asia and Africa (18%).

The company operates in three key segments: consumer, pharmaceutical and medical equipment. 55% of the revenue comes from the pharmaceutical segment, about a third is generated from the medical equipment segment (28%), and the other 17% comes from the consumer segment.

Pharmaceutical segment

The pharmaceutical segment focuses on five therapeutic areas, including:

  • Immunology (rheumatoid arthritis, inflammatory bowel disease, psoriasis and lung disease);
  • Infectious diseases and vaccines (human immunodeficiency virus (HIV), hepatitis, respiratory infections, tuberculosis and vaccines);
  • Neurology (Alzheimer's disease, mood disorders and schizophrenia);
  • Oncology (prostate cancer, hematological malignant neoplasms and lung cancer);
  • Cardiovascular and metabolic diseases (thrombosis and diabetes).

Consumer segment

The consumer segment includes a range of products used in childcare, as well as oral care, skin care, over-the-counter pharmaceuticals and women's health. The category of children's products includes the JOHNSON'S product line. The Oral Care category includes the LISTERINE product line. Brands in the cosmetics category include the AVEENO, CLEAN & CLEAR, DABAO, JOHNSON'S Adult, LE PETITE MARSEILLAIS, NEUTROGENA, RoC and OGX product lines. The over-the-counter drug category includes the TYLENOL family of acetaminophen products; SUDAFED - remedies for colds, flu and allergies; allergy products BENADRYL and ZYRTEC. Wound care brands include BAND-AID and the NEOSPORIN First Aid product lines.

Medical equipment

The medical device segment includes a range of products used in orthopedics, surgery, cardiovascular health, diabetes and vision care. The segment's products are used primarily in professional fields by doctors, nurses, hospitals, ophthalmologists and clinics. The segment includes: orthopedic products, products for general surgery, biosurgical, endomechanical and energy products; electrophysiological products for the treatment of cardiovascular diseases; sterilizing and disinfecting agents to reduce surgical infection; means to monitor blood glucose levels; insulin delivery devices and disposable contact lenses.

It is important to note that the pharmaceutical segment is playing an increasingly significant role in Johnson & Johnson's operations. In 2013 this segment had approximately the same weight in the share of the company's revenue as the medical equipment segment. However it has been the fastest growing segment since then. On the contrary, the share of medical equipment is declining.

Financials

Pharmaceutical segment

The most important segment of Johnson & Johnson - judging by the 55% revenue share - ended the year of 2020 with a stable growth of 8.2% and amounted to $ 45.572 billion.

The largest sector of the segment - immunology - grew by an identical 8.2%. One of the most important products of Johnson and Johnson - STELARA (treatment of plaque psoriasis), showed superb results. In 2020 its sales increased by 21.1% YoY. Hence, STELARA brought in $ 7.70 billion. Revenue from the second largest drug in the sector REMICADE, on the contrary, fell by 13.8% YoY to $ 3.74 billion.

The oncology sector grew by 15.8% YoY as of December 2020. The two largest drugs in the sector - DARZALEX and IMBRUVICA - showed rapid growth: 40.3% and 21.5% YoY ($ 4.19 billion and $ 4.12 billion, respectively).

According to the company’s guidance, a stable growth of this segment is expected to continue in 2021.

Medical equipment

Operating sales of medical devices decreased 11.4% in 2020 to $ 22.959 billion.

The decline was mainly driven by the negative impact of the COVID-19 pandemic and the associated postponement of medical procedures. Thus, revenue from sales of products of the orthopedic sector fell by 12.3% YoY, and the surgical sector by 12.8%, amounting to $ 7.76 billion and $ 8.23 ​​billion, respectively.

This segment is expected to continue experiencing some downturn in the short term but remains attractive in the second half of 2021 as well as in the long term.

Consumer segment

Sales in the consumer segment grew by 3.0% YoY and brought the company $ 14.053 billion.

This segment will develop at a moderate pace, especially from the beginning of the second half of 2021 i.e., as soon as life returns to its previous course and the need for personal care and health products grows. The general trend in the development of e-commerce, in the field of everyday goods, is also a contributing positive factor.

The largest owners of the company are The Vanguard Group (8.66%), State Street Global Advisors (5.47%) and BlackRock Institutional Trust Company (4.70%).

Johnson & Johnson’s Strengths 

Stability

A whole range of characteristics of this company boil down to one thing - security. Johnson & Johnson is distinguished by a non-cyclical nature of the business and low sensitivity to economic cycles, as well as diversified sources, and geography of income (the largest pharmaceutical company), and a large portfolio of products. Johnson & Johnson is one of only two AAA-rated companies in the entire US market. According to this rating, now, the company has a lower chance of default than US government bonds.

One of the key indicators of the company's credit risk is its net debt / EBITDA ratio. For some time until 2017, the company had a negative ratio. However, In 2017 the acquisition of the Swiss company Actelion, which specializes in the production of drugs for the treatment of rare diseases, took place. The deal was worth $ 30 billion in cash, making it the JNJ’s largest purchase in the history. Despite this, the company still has the lowest net debt to EBITDA ratio (0.25x) among its competitors.

Dividends

This dividend aristocrat has been raising its dividend payments for 58 years in a row now. Despite the challenging 2020, the company has enough liquidity to continue paying dividends in the future.

Vaccine against COVID-19

The Johnson & Johnson vaccine has several competitive advantages. Firstly, it only takes one injection for its action, not two. Secondly, there is an advantage in terms of logistics and storage. This vaccine can be stored at 2-8 ° C. A total of 1.27 billion doses were ordered as of mid-December 2020, each of which is expected to cost about $ 10. It’s partly for this reason that company’s revenue for 2021 is forecast to grow by more than 10%.

It is worth noting that Johnson & Johnson has an extensive network of suppliers and contacts due to its global presence. Despite not the highest efficiency (66%), all the above makes the vaccine from this company an in demand product, especially in the developing countries around the world.

Aging population

It is projected that by 2050 the number of people over the age of 60 worldwide will double and reach 2 billion. People who have reached retirement age spend more money on medicines than people under 40. Further, statistics show that the 55–75 age cohort owns the largest amount of net assets, and this makes its members important economic agents. There is no doubt that these trends benefit a company like Johnson & Johnson, whose products are often used by older people.

Risks

Potential for Litigations

As the largest pharmaceutical company, Johnson & Johnson undergoes many quality-related audits. The company has been the subject of a fair amount of litigation over the past few years. As can be assumed, their settlement requires tens or even hundreds of millions of dollars. Should many of them happen in the foreseeable future, the company may face some unnecessary need to waste their liquidity.

Regulatory risk and government pressure

Like the entire healthcare industry, Johnson & Johnson is potentially subject to changes in legislation regarding certain procedures or drugs. What's more, President Biden has pledged to make drugs more affordable for Americans, which could lead to lower revenues for some drugs.

Valuation 

To value Johnson & Johnson’s stock, I used two methods - the discounted cash flow (DCF) method and the comps method.

For the DCF valuation, I forecast cash flows up to 2025, making moderately conservative revenue forecasts.

Here’s a short list of the factors that contribute to a more than 10% growth in 2021: the recovery of the global economy, the release of the vaccine against COVID-19, promising candidate drugs awaiting FDA approval, as well as potential acquisitions, due to high liquidity coupled with low debt obligations. A further forecast of revenue growth, starting from 2023, at 3.5% is due to the conservative assumption that growth rates will remain the same or slightly decrease (average growth from 2011 to 2023 - 3.65%).

 

2017

2018

2019

2020

2021E

2022E

2023E

2024E

2025E

Revenue

($M)

76 450

 

81 581

 

82 059

 

82 584

 

91 536

 

95 680

 

99 029

 

102 495

 

106 082

 

Revenue Growth

 

6.7%

0.6%

 

0.6%

 

10.8%

 

4.5%

 

3.5%

 

3.5%

 

3.5%

 

 

 

2020

2021E

2022E

2023E

2024E

2025E

 

Terminal Value

FCFF ($M)

20 000

 

21 265

 

22 228

 

23 006

 

23 811

 

24 644

 

 

582 320

 

Discount Rate

 

1.03

1.09

1.16

1.23

1.31

 

1.35

Discounted FCFF ($M)

 

20 635

 

20 310

 

19 794

 

19 291

 

18 801

 

 

443 213

 

 

 

WACC

 

 

6,20%

Debt $B

 

35

 

Equity $B

 

429,1

 

Equity Weight

 

92,46%

 

Debt Weight

 

7,54%

 

Cost of Equity

 

6,64%

 

Cost of Debt

 

0,9%

 

Income Tax

 

17%

 

Thus, the fair value, according to DCF, is $ 205.90.

For a more accurate assessment, I also used the multiples approach.

 

 

Company Name

 

Market Cap($M)

 

Price / EPS (NTM)

 

Price/S (NTM)

 

EV/EBITDA (NTM)

 

EV/S (NTM)

 

Johnson & Johnson

 

448 256

 

17.25

 

 

4.77

 

13.32

 

4.87

Pfizer

224 019

10.95

3.20

9.29

3.57

Eli Lilly and Co

188 170

23.86

6.84

20.61

7.32

Merck & Co

198 234

11.51

3.72

9.55

4.18

Abbvie

205 641

8.85

3.59

9.41

4.91

Amgen

144 431

14.95

5.48

10.95

6.32

Novartis

220 368

13.73

4.18

13.25

4.83

Median

 

 

 

12.62

 

3.95

 

10.25

 

4.87

 

Target P/E (NTM)

12.62

Forecasted EPS 2021

9,58

Fair Value (P/E)

$ 120.90

Forecasted Revenue 2021 ($M)

91 438

Target Price/Revenue (NTM)

3.95

Fair Value (Price/Revenue)

$ 135.82

Forecasted EBITDA 2021 ($M)

33 157

Target EV/EBITDA (NTM)

10.25

Fair Value (EV/EBITDA)

$ 127.64

Target EV/Revenue ($M)

4.87

Fair Value (EV/Revenue)

167.25

 

The equally weighted fair value according to comps method is $137.90.

So, if we give 30% weight to the comps method and 70% to the DCF method, we’ll have a fair price for Johnson & Johnson over the next 12 months of $188.68, which means JNJ has a potential upside of about 11% from today’s price of $170.

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188.68

Target Price

8/ 10

Confidence

1-3 Years

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