Johnson & Johnson (NYSE:JNJ) currently trades at 23 times trailing earnings, which we’d normally consider to be a bit high for a stable consumer health and healthcare company. Revenue was 7% higher in the third quarter of 2012 than in the same period in 2011. While earnings were down, that decrease was entirely due to higher research and development expenses; if we strip out an in-process R&D expense pretax income was actually up 4%, and there were increases in the normal R&D item as well. Of course, it’s possible that for whatever reason these increases in spending are permanent rather than that they are one-time items which will be reversed in the coming quarters, allowing the company to capitalize on its higher revenues merely on a delayed basis. In theory, however, Johnson & Johnson should not need to dedicate further revenue growth to research and development and as we can see from these results it would likely not have to increase other costs by much either.
Yet even if we assume a modest increase in earnings we’re not sure that the company’s recent performance justifies its current valuation. Wall Street analyst expectations are for $5.49 per share in earnings for 2013, implying a forward P/E of only 13. That would be a more reasonable multiple for the company, though it of course depends on higher net income this year than last year. It should also be noted that Johnson & Johnson is something of a classic defensive stock, and it does have both a low beta (at 0.4) and a moderately high dividend yield (at 3.4%).
Johnson & Johnson was billionaire Ken Fisher’s Fisher Asset Management’s second largest single-stock holding by market value at the end of September, with a position of close to 11 million shares (find more of Fisher’s stock picks). It was also the top pick of Fairfax Financial Holdings; Fairfax is managed by Prem Watsa, who has been called “the Warren Buffett of Canada.” Research more of Watsa’s favorite stocks. George Soros was buying Johnson & Johnson during the third quarter as well (check out more stocks Soros was buying).