Why Johnson & Johnson Should Outperform in 2014

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Johnson & Johnson (NYSE: JNJ  ) climbed 2% today after RBC Capital upgraded the health-care gorilla from "sector perform" to "outperform."

So what: Along with the upgrade, analyst Brandon Henry boosted his price target to $104 (from $88), representing about 13% worth of upside to yesterday's close. While value investors might be turned off by Johnson & Johnson's strong share price over the past year, Henry believes there's plenty of room to run given his expectation of continued margin expansion.

Now what: RBC expects Johnson & Johnson to post 2015 EPS of $6.42, $0.14 above of the Wall Street consensus.

"While the near term investment thesis in JNJ will continue to be about pharma growth, we believe that investors may be overlooking the operating margin expansion opportunity that exists over the longer term," noted RBC. "Overall, we believe that JNJ is positioned to deliver 100-150bps of annual operating margin leverage over the next three years, as spend behind recent pharma launches abates and consumer remediation spend slows, and f/x becomes less of a drag."

When you couple that positive outlook with Johnson & Johnson's forward P/E of 15, the stock certainly seems like a reasonably priced opportunity. 

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