Johnson & Johnson's Inflection Point: What it Means for Investors

Key Points

• Johnson & Johnson stock had a strong quarter, and shares are moving higher. 
• The company raised guidance for the year and it may be cautious. 
• The stock confirms support at a long-term uptrend line and is ready to rebound higher. 

After three years of waiting, Johnson & Johnson NYSE: JNJ shares have returned to trend, a monumental event for the market which presents a potential buying opportunity for income investors.

Not only is Johnson & Johnson's business sound but results from competitors like Abbott Laboratories NYSE: ABT and trends within the consumer health market suggest strength will continue. Johnson & Johnson price action may experience some volatility soon, but the long-term outlook is bullish. 

Johnson & Johnson Grows in Q2 

One of the advantages of Johnson & Johnson is less volatile exposure to COVID-19. Where Abbott's exposure is to diagnostics and testing, which are rapidly declining, Johnson & Johnson is more exposed to the vaccine side, which will remain healthy. The results include top- and bottom-line growth compared to Abbott's year-over-year (YOY) decline. 

Johnson & Johnson reported $25.53 billion in net revenue for a gain of 6.4%, beating the MarketBeat.com consensus by $0.860 billion, or about 350 basis points. 

Gains were made in all regions and segments, led by the U.S. and medtech. Sales in the U.S. grew by 10.2% compared to 2.2% for the international market. Medtech grew by 12.9%, driven by the resumption of elective procedures globally. Consumer health grew by 7.7% and pharmaceuticals by 3.8%.

The margin news is also good. The company was able to control costs and leverage sales growth to widen the margin, if only slightly. The company's net earnings outpaced revenue growth by a few dozen bps, while the GAAP and adjusted EPS did the same to net earnings. Share repurchases aid adjusted EPS, but it is strong regardless. The $2.80 in adjusted EPS is up 8.1% compared to last year, beating the consensus by 18 cents, or 680 basis points and leading to an increase in guidance. 

Johnson & Johnson issued favorable guidance. The company raised the mid-points for top- and bottom-line results to a range well above the previous forecast. The company expects adjusted EPS of $10.70 to $10.80 compared to the $10.65 consensus, which is likely cautious. The company shows momentum in its core operations that could build as the year progresses. 

Johnson & Johnson Offers Yield and Value 

Johnson & Johnson offers yield and value relative to Abbott Laboratories and the broad market. The stock trades at only 15x earnings compared to nearly 17x for the broad market and 25x for ABT stock. Johnson & Johnson also has a more favorable yield at 3% compared to only 1.9% at ABT. Both payouts are equally safe, the companies are Dividend Kings with low payout ratios near 45%, but JNJ's is the better buy. 

The analysts are less enthusiastic about JNJ stock than ABT, but that may change soon. JNJ is pegged at "hold" compared to ABT's "moderate buy," but both have a high-single-digit to low-double-digit upside potential. The question for each is if the analysts will be jazzed by the results and begin lifting their targets. If they do, it will signal a bottoming in sentiment that will help support the market at the long-term trend line. 

This chart is interesting because of the setup. The market is in a long and sustained uptrend and testing support at the trendline. Support looks solid now; another rally should form if the market follows through on the signal. 

In this scenario, the market should move above $165 soon and trend upward to an all-time high and possibly to new highs later this year. If not, JNJ could remain range-bound at current levels until there is more clarity on the economic outlook for 2024.