With a market cap of $442 billion and annual revenues exceeding $94 billion, Johnson & Johnson (JNJ) is one of the world's largest and most diverse healthcare companies. The company operates under three divisions: Pharmaceutical, Medical Devices, and Consumer. However, in November of this year, JNJ announced plans to spin off the consumer division.
The Pharmaceutical and Medical Devices segments represent about 80% of sales and drive the majority of cash flows for the firm. The pharmaceutical portfolio focuses on immunology, oncology, neurology, pulmonary, cardiology, and metabolic diseases. The medical device segment focuses on orthopedics, surgery tools, and vision care. The consumer business product line includes baby care, beauty, oral care, over-the-counter drugs, and women's health.
I am bullish on JNJ stock as I believe its strong sales growth will continue, and the separation of the consumer business will create value for current shareholders.
Pharma Segment
In November, JNJ provided an update on its pharmaceutical business, highlighting continued revenue growth through 2025 at a CAGR greater than 5%. This would bring $60 billion in revenues by 2025, which includes 14 novel therapies with sales potential of greater than $1 billion, five of which may exceed $5 billion in revenues.
Those five products with significant potential are cilta-cel (BCMA CAR-T) for multiple myeloma, amivantamab + lazertinib for NSCLC, TARIS platform for bladder cancer, nipocalimab (anti-FcRn) for autoantibody-driven diseases, and milvexian for thrombosis.
Between 2026 and 2030, the company anticipates more than 65 potential transformational therapies to be filed, including 16 to 18 novel therapies. Investors may not be properly valuing the JNJ product portfolio and pipeline.
Some investors are focused on COVID-19 related vaccinations and treatments, which should make up only about 2.6% of total company sales this year. Regarding the COVID-19 vaccine, the company stated that they expect to deliver 1 billion doses in 2022 at a not-for-profit price.
Separation of Consumer Health Division
On November 12th, JNJ announced its intent to separate its Consumer Health business into a new publicly-traded company. The new entity would be a leading global consumer health company, reaching over one billion consumers worldwide. Well-known brands under this division include Neutrogena, AVEENO, Tylenol, Listerine, and BAND-AID, to name a few.
This business is expected to generate approximately $15 billion in revenues in 2021. Pre-tax margins in this segment are in the 23-25% range. The separation is not expected to occur until late 2022.
Third Quarter Results
JNJ produced solid results in Q3 2021 with revenue growth of 10.7%. Adjusted operational growth was approximately the same. Adjusted earnings per share increased by 18.2%. International revenue growth, which represents roughly half of the entire company, was strong at 13.5%. In terms of segments, the pharmaceutical division took the lead with 13.8% operational revenue growth.
The company has $31 billion in cash as of quarter-end and $34 billion in total debt. Year-to-date free cash flow was approximately $15 billion, of which $8.2 billion was spent on dividends. JNJ is one of the few corporations left with an AAA rating.
Valuation
Analysts are projecting EPS of $9.80 for this year and $10.38 for next year. Thus, a P/E ratio of 17x and 16x, respectively, does not seem too elevated. With industry-leading sales growth and a full product pipeline, JNJ should trade at least at a multiple of 20x, which is closer to the S&P 500's multiple.
Wall Street's Take
Turning to Wall Street, Johnson & Johnson has a Strong Buy consensus rating, based on six Buys and one Hold assigned in the past three months. At 189.83, the average Johnson & Johnson price target implies 12.8% upside potential.
Disclosure: At the time of publication, Tom Kerr did not own shares of any stocks mentioned above.
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