Is Johnson & Johnson a Good Stock to Buy?

While Johnson & Johnson is a megacap healthcare company providing pharmaceuticals and medical instruments, and so we can compare it to Merck & Co., Inc. (NYSE:MRK), Pfizer Inc. (NYSE:PFE), and Covidien plc (NYSE:COV), many of its products are such household items that The Procter & Gamble Company (NYSE:PG) might actually be the closest peer. Procter & Gamble has a slightly lower beta than Johnson & Johnson, and a roughly equal dividend yield. Its most recent quarterly report shows a small decline in both revenue and earnings compared to the same period in the previous fiscal year, though the sell-side expects improving numbers here: the trailing and forward P/Es are 19 and 16, respectively. As with Johnson & Johnson, those multiples are too high for us to consider the stock as a value play.

Merck and Pfizer have similar pricing to Johnson & Johnson: they trade at about 20 times trailing earnings and at 11 times forward earnings estimates in each case. With earnings growth not particularly good, and negative in Pfizer’s case, we don’t think that we’d want to depend on analyst optimism coming true here. Covidien’s business has been about flat, according to recent reports, and its trailing P/E is 15. At that pricing we’d want to see some amount of sustainable earnings growth, and so perhaps Covidien would be a good stock to watch for its next quarterly report.

Too much of Johnson & Johnson’s current valuation appears to be based on expectations of future earnings growth for such a mature company- particularly one whose bottom line is showing little growth even when we assume that recent increases in R&D will turn out to be one-time events. As a result we wouldn’t be buying the stock right now and its peers do not look like good values either.