Is It Time to Buy Johnson & Johnson's Stock?

A common belief among investors is that it can be considerably tougher for megacap blue-chip companies to double compared to small-caps stocks. Healthcare conglomerate Johnson & Johnson (JNJ -0.72%) would like to put to rest those assumptions based on its performance since the end of the recession.

JNJ data by YCharts

But after its share price doubled, and with a market cap that has hit $293 billion, the question has to be asked: Is Johnson & Johnson still a buy?

Today we'll take a closer look at some of the factors which are working to pull the stock ever higher, while also examining some of the headwinds which threaten to pull shares lower, and answer that question.

However, before we dive into J&J I believe it's worth reminding investors that the stock market is a dynamic business with investors on both sides of each trade. In simpler terms this means that a stock has just as much chance of rising as falling, and that the cumulative opinions and actionable trades of millions of people around the globe ultimately determine stock prices. In sum, just because I'm making a call one way or another doesn't guarantee things will go as planned, so keep that in mind as you read on and make sure to formulate your own investing thesis around Johnson & Johnson.

Johnson & Johnson by the numbers
If we're going to take a closer look at this healthcare giant, the first thing we should do is compare some of its important financial metrics to those of some of its peers. While we do care a lot about the internal factors driving growth and profitability, it's also worthwhile to understand how investors are currently valuing J&J relative to its peers.

Here are the metrics every investor should know about Johnson & Johnson and its peers:

Source: Yahoo! Finance, TTM = trailing 12 months.

As you can see, these healthcare giants have a lot in common -- although there are some subtle differences which we should note. On a side note, if you're curious why I chose Novartis, Pfizer, and Roche, it's because next to Johnson & Johnson they represent the most geographically diverse pharmaceutical pipelines, and they're about as comparable in market cap as you can get.

When it comes to dividend yield there's not much difference between these companies. However, Johnson & Johnson is considered a dividend aristocrat, having increased its dividend in 52 consecutive years. This streak is one reason value and income investors have flocked to J&J over the years, and it acts as a stabilizing factor as the stock has many long-term stakeholders.

In terms of five-year growth projections, Johnson & Johnson comes in second of four even though its pharmaceutical segment has generated more in cumulative revenue from new drugs launched since 2009 ($12.5 billion) than any of its comparably sized peers in the U.S., Europe, or Japan.

Johnson & Johnson Q2 investor presentation slide. Source: Johnson & Johnson.

You'll note Pfizer's subpar growth rate, which is primarily tied to ongoing patent losses and the expected loss of arthritis drug Celebrex, a $3 billion per year drug, later this year. 

Profit margins for these giants are also quite comparable, with the exception of Novartis. One thing to keep in mind is that Novartis' subsidiary, Sandoz International, is a generic drug producer, and generic drugs inherently have lower margins derived from their cheaper prices. Generic drug producers often make up for these low margins with a large amount of volume. Therefore, while Novartis may look like a clear gross margin underperformer, I'd say that all four are on near-equal ground when it comes to their branded-drug margins.

Finally, on a forward P/E basis you'll see that Pfizer sits well below its peers while Roche and J&J occupy the high end. I'd suggest this variance makes sense given that Roche's oncology-focused pipeline and Johnson & Johnson's recent drug launch success give these two companies a much-deserved "premium." By comparison, ongoing annual revenue declines from Pfizer related to exclusivity losses are to blame for its "cheaper" valuation.

Is Johnson & Johnson a buy?
Now that we've taken a closer look at some of the valuation metrics investors might use to compare Johnson & Johnson to its peers, let's backtrack to the original question: Is Johnson & Johnson still a buy?

Source: Sarah Reid via Flickr.

My response to that question is "Yes," Johnson and Johnson is still an attractive buy. Let me explain my reasoning why.

On one hand I did my best to avoid being blinded by J&J's blue-chip name and diverse business model. As we examined previously, Johnson and Johnson faces near-term headwinds, including hospitals and consumers tightening their wallets on elective procedures, which could hurt its medical device segment. There are also concerns that notoriously high prescription drug prices in the United States could come under pressure if Congress, pharmacy-benefits managers, or insurers get fed up with them. Finally, the loss of exclusivity on J&J's nearly $7 billion per year arthritis drug Remicade come Sept. 2018 is bound to cause pause among investors.

Yet when all is said and done I find that the positive catalysts handily outweigh these aforementioned negatives.

In my opinion Johnson & Johnson is sitting on a practical gold mine of possible blockbusters. Specifically, I'd point to blood cancer drug Imbruvica, which is licensed from Pharmacyclics, and SGLT2-inhibiting type 2 diabetes drug Invokana.

Imbruvica's overall response rates in chronic lymphocytic leukemia (CLL) and mantle cell lymphoma (MCL) were incredibe, initially earning it and Pharmacyclics the breakthrough therapy designation and allowing for an expedited approval from the FDA in both indications. Not to mention Imbruvica looks to be a giant leap forward in patient quality of care in CLL and MCL.

Johnson & Johnson Q2 investor presentation slide. Source: Johnson & Johnson. 

For Invokana, the new pathway of treatment -- SGLT2 inhibitors work in the kidneys by blocking glucose absorption, allowing patients to remove excess glucose through their urine -- coupled with its welcome weight-loss side effect could be a potential catalyst that pushes DPP-4 inhibitors (which work through the liver and pancreas) for market share in second-line type 2 diabetes treatments.

But it's more than just pharmaceutical sales that'll send Johnson & Johnson higher. I suspect the Affordable Care Act is going to be a long-term boon for J&J. Right now we're at a point where consumers, hospitals, and insurers are still trying to feel out how premium pricing and consumer health insurance utilization is going to work. As both sides get a better feel on these aspects in the coming years, and as more baby boomers reach their golden years, we could see a surge in preventative care visits that may result in across-the-board gains for J&J's pharmaceutical and medical device/diagnostics operations.

Finally, I believe it's worth pointing out that J&J's slower-growth consumer products division and higher growth branded pharmaceutical business complement each other nicely. Johnson & Johnson's stock is minimally volatile, pays a very stable and growing dividend, and would likely outperform the benchmark indexes in a downtrending market thanks to its diversity and base of long-term shareholders.