D'oh. Time to 'fess up, folks. Lost in the helter-skelter of earnings season, with companies reporting right and left, I just plumb forgot about Johnson & Johnson (NYSE:JNJ). My bad. But this is fixable.

This giant of the health-care world reported its second quarter 2005 earnings last week but, by all appearances, failed to impress Wall Street. Over the past few days, J&J's stock has lost about 2.5% of its value. That much is obvious to anyone who can read a stock chart. What's less obvious, I suspect, is what aspect of J&J's numbers triggered such a slide. After all, the company reported remarkably stable sales numbers, up 11.1% year over year, both for Q2 2005 vs. Q2 2004 and H1 2005 vs. H1 2004. Performance doesn't get much more reliable than that.

It's true that profits were a bit underwhelming in Q2 itself -- up just 8.9% over the year-ago quarter. But you'd think that the type of blue-chip investors JJ tends to attract would realize that three months does not an investment make, and focus instead on the long term. When viewed through the prism of year-to-date performance, J&J scored a perfectly respectable 13.2% jump in earnings over its H1 2004 numbers.

Honestly, I suspect that the real reason J&J's stock has been limping along over the past few days has little to do with the company turning in a poor quarter. Instead, it's because Johnson & Johnson is one pricey stock.

If you judge the company simply on its price-to-earnings ratio (P/E), with trailing 12 months earnings of $9.2 billion, the company currently sports a P/E of 20 -- twice the annual percentage growth rate that analysts project for it over the next five years. With that PEG of 2, it's hard to call any company "cheap." And when a pricey company reports profits growth below the rate that analysts expect it to generate in the long term, it's bound to give potential buyers pause. Worse, J&J's even pricier based on its free cash flow (FCF). Using the trailing-12-months numbers provided by Yahoo! Finance (because J&J didn't provide current FCF numbers with its press release), we see that the company carries a price-to-free cash flow ratio of 26, so it's not quite as profitable, on a cash basis, as its GAAP numbers would suggest.

When investors have the option of buying J&J at the multiple of 26 times free cash flow, or a competitor like Procter & Gamble (NYSE:PG) with less than half that multiple and a better projected growth rate, it's no wonder ol' JJ's stock isn't feeling particularly dyn-o-mite this week.

No more tears! We've got further Foolishness:

F ool contributor Rich Smith has no position in either company mentioned above.