Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Johnson & Johnson (NYSE:JNJ) had an amazing 2013, especially when you look at how the company's share price has risen thus far this year. Year to date the stock is up more than 34%, which is better than both the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500, as you can see below.
OK, so you're not that impressed with what the stock did this year, considering that 17 of the Dow's other 30 components also outpaced the blue-chip index this year. That's understandable, though the argument could be made that Johnson & Johnson and those other companies are all large, mature organizations that must battle for every incremental increase to revenue and earnings. But when we are talking old and mature, not many of even the venerable Dow's components can compete with J&J's history, since the company was founded in 1886. With that kind of history, investors don't typically expect 30% gains in one year.
So with that kind of price performance you may be thinking the stock is trading at a ridiculous price-to-earnings. While it may be high for the company, at 21 times past earnings and 16 times future expected results, the valuation isn't stretched too thinly yet. Furthermore, with revenue growth of 10% in the company's pharmaceutical unit during the first three quarters of the year and medical device sales rising 5.7% during the same time frame, the company may be a faster-growing business than many investors thought.
Additionally, as the company dealt with one recall problem after another in 2012, the valuation metrics fell slightly behind, so the share price performance in 2013 could also be connected to the fact that the stock was undervalued heading into the year.
Moving forward, investors can expect growth from Johnson & Johnson, but not a massive amount at this time. The consumer side of the business still represents a large portion of revenue and that unit is a slow mover. But as Johnson & Johnson grows its medical device and pharmaceutical segments and builds a more balanced company, the potential revenue and earnings growth could be large. Current shareholders should hold tight, and investors looking to get into a strong, stable, and potentially very profitable investment, should really consider buying shares.
Fool contributor Matt Thalman owns shares of Johnson & Johnson. Check back Monday through Friday as Matt explains what causing the big market movers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter @mthalman5513.
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