Johnson & Johnson is as Cheap as it’s Going to Get

Key Points

• Johnson & Johnson's mixed quarter revealed core strength and a widening margin. 
• Guidance was raised with the mid-point for earnings above consensus. 
• Analysts support this market and see it advancing at least 10%. 

Shares of Johnson & Johnson NYSE: JNJ are as cheap as they will get. The stock is down in premarket trading following the Q1 release, but there is a bottom in play and reality to face. Trading near $145, JNJ stock is valued at less than 14X this year’s earnings guidance, which is a deep discount from historical norms. Add in the fact that the dividend yield is at the high end of the historical range, which was increased again, and the odds are high that this stock will rebound soon and resume its long-running uptrend. 

Johnson & Johnson’s Mixed Quarter Is Good News for Investors

Johnson & Johnson had a mixed quarter, but in a way that should leave the market in good shape. The company reported $21.4 billion in net revenue for a growth of 2.3% compared to last year. The growth was as expected, which is good news given the number of moving parts within the business, but the margin exceeded the consensus reported by Marketbeat.

Operationally, the ongoing business grew by 3.9% adjusted for the Kenvue NYSE: KVUE split and 7.7% adjusted for the impact of COVID-19; both are good numbers. Sales in the US offset sales abroad; the US is up 7.8%, while International sales declined modestly. Medtech led segmentally, good news for names like Abbott Laboratories NYSE: ABT and Intuitive Surgical NASDAQ: ISRG, with growth near 6.5% followed by a 2.5% gain in Innovative Medicines. 

The margin news is good. The company was able to widen the net margin and deliver solid GAAP and adjusted results. The GAAP earnings of $2.20 reverse losses posted in the previous year, while the adjusted $2.71 is up 12.4%. Adjusted earnings also outpaced the Marketbeat.com consensus estimate by $0.06 and played into the guidance. 

Johnson & Johnson raised its mid-point for revenue and earnings to put revenue in alignment with consensus and earnings above it. Because the company is gaining momentum now, guidance may be raised later this year. 

Johnson & Johnson Analysts Think This Stock is Undervalued

Johnson & Johnson analysts think this stock is undervalued because it is trading below the low end of their target range. The low end of the range is 10% above the current price action, and the consensus adds another 1000 basis points of upside. The trend in sentiment has the stock pegged at Hold, but the price target is rising compared to last year and last month and is unlikely to reverse now. Analysts may not catalyze a rally, but they support a floor in the market that is unlikely to be broken. The latest revision is from Cantor Fitzgerald, reiterating an Outperform rating and price target of $215, the highest on tracked by Marketbeat. 

Johnson & Johnson’s dividend is among the reasons analysts Hold this stock. The payment is running near 3.25%, with shares near long-term lows, and it increased this quarter. The Q1 report included a 4% increase in payouts, which extends JNJ's record to 62 consecutive annual increases. The payout ratio remains low at 45%, so annual increases should continue indefinitely. 

Oversold Johnson & Johnson Falls to Solid Support

The price action in JNJ stock fell in premarket action but already shows some signs of support. The market is at a critical level and likely to sustain support if it does not rebound. Assuming the market takes advantage of the opportunity, JNJ should begin to rebound soon. If not, the market could wallow at these levels until later in the year. However, there is always the risk the market will fall through critical support at the $145 level. In that scenario, JNJ stock could fall into the $120 to $135 range, but that is not expected.