Johnson & Johnson stock (JNJ) appears to present its most compelling buying opportunity in over a decade, following an extended period of underperformance in recent years. Despite broad indices hitting new highs, JNJ stock hasn’t gone anywhere since 2021. This lack of share price gains during this period is surprising, especially given the company’s robust results and expectations for record profits this year. This has resulted in shares trading at a highly attractive valuation. For this reason, I am bullish on its stock.
Q1 Results Set the Stage for Record FY2024 Profits
JNJ’s Q1 results set the stage for record profits in FY2024, contrasting the stock’s underperformance. Specifically, the company reported sales of $21.4 billion, up 3.9% from the same period last year. This growth was driven primarily by strong performance in the U.S. market, which saw an impressive 7.8% increase in sales, more than offsetting the slight decline of 0.3% in international markets.
One of the main drivers of this quarter’s growth was JNJ’s Innovative Medicine segment. At first glance, the segment’s sales of $13.6 billion imply a mere 2.5% year-over-year increase. However, excluding any one-off impacts related to the COVID-19 vaccine, the segment posted operational sales growth of 8.3% globally.
Key drivers included the multiple myeloma portfolio, with DARZALEX celebrating a year-over-year increase of 21%, and the strong launches of TECVAYLI and CARVYKTI, which reported sales of $133 million and $157 million, respectively.
Other highlights in Q1 include the following:
- ERLEADA, JNJ’s prostate cancer treatment, which posted a 28.4% increase in revenues in constant currency (CC), driven by market share gains in oncology.
- JNJ’s Pulmonary Hypertension Portfolio, whose revenues surged by 22.4% in CC due to favorable patient mix and market growth for OPSUMIT and UPTRAVI.
- TREMFYA, JNJ’s plaque psoriasis treatment, which posted growth of 27.6% in CC due to market expansion and share gains.
These numbers clearly highlight that JNJ remains a dynamic company with numerous growth catalysts beyond its core Consumer Health segment despite the market’s tendency to undervalue it as a sluggish performer.
In terms of margins, JNJ posted a gross profit of $14.9 billion for the quarter, implying a gross margin of 69.6%, up from 68.0% in the same quarter last year. This gain was driven by effective cost management and a favorable sales mix.
Selling, marketing, and administrative expenses grew slightly to $5.3 billion, or 24.6% of sales, compared to 23.5% last year. That said, R&D expenses as a percentage of sales remained steady at 16.6%, allowing for an overall margin expansion. Accordingly, adjusted earnings per share rose by 12.4% to $2.71.
With such a strong start to the year, JNJ’s management raised its adjusted operational EPS guidance to a range of $10.60 to $10.75. This new forecast reflects a year-over-year growth rate of about 7.7% and a new record adjusted EPS figure for the healthcare giant.
JNJ’s Valuation Presents Best Opportunity in Over a Decade
JNJ’s share price has significantly lagged despite the expectation of record adjusted EPS this year, leading to a substantial valuation compression. This has formed the most attractive buying opportunity in over a decade to buy the stock, in my opinion. At a forward P/E of 14.4x, the stock is not only notably cheaper from its past-decade average of about 17x, but it has only not been this cheap since late 2012 (excluding a brief period during March 2020’s flash crash).
For this reason, the stock also currently trades with a dividend yield of 3.3%, the highest in 12 years. With JNJ being a high-quality company that rarely goes on sale, having the chance to buy the stock at its current valuation/yield mix implies a compelling opportunity, especially for dividend-growth investors.
Is JNJ Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, Johnson & Johnson features a Moderate Buy consensus rating based on eight Buys and seven Hold recommendations assigned in the past three months. At $174.79, the average JNJ stock forecast suggests 17.1% upside potential.
The Takeaway
JNJ stock presents an attractive investment opportunity. Despite recent underperformance, the company’s results remain strong, and profits are projected to hit new highs in FY2024. At the same time, the stock’s current valuation and dividend yield each imply that this is the best time to consider JNJ in over a decade.
