Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Is Johnson & Johnson a Good Stock to Buy?

Johnson & Johnson (NYSE:JNJ) took a hit to its earnings in the second quarter of the year, with net income falling by about half compared to its results in the second quarter of 2011. The good news for the company- and for shareholders- is that revenues were about even between the two quarters, and that the decline was caused by a number of miscellaneous nonoperating expenses. Johnson & Johnson is now up only 5% for the year, but that reflects a large improvement from where it was in early June. The personal products company saw little difference in performance among its three operating segments: consumer, pharmaceutical, and medical devices and diagnostics all showed less than a 5% change in revenue.

Warren Buffett portrait

Partly because of the lower earnings that it experienced last quarter, which may have been abnormally low, Johnson & Johnson carries a trailing P/E of 22. Looking ahead, to 2013, the P/E multiple based on analyst consensus comes out to 13. We’re not sure how reliable these projections are, but certainly if the company can meet them it would look to be a good value. The dividend yield is 3.5%, and investors are a bit protected from a downside as the beta is 0.5.

Warren Buffett’s Berkshire Hathaway, which has famously had a position in Johnson & Johnson for some time, cut its stake in the company during the second quarter. It finished June with 10 million shares in its portfolio, which while quite substantial was a reduction of 64% from what it had owned at the beginning of April (find stocks that Warren Buffett bought instead). The “Warren Buffett of Canada”, Prem Watsa, however, stayed steady with the stock. His Fairfax Financial Holdings kept its position of 6 million shares constant over the course of the quarter meaning that with the decline in Research in Motion’s stock price Johnson & Johnson became the fund’s largest 13F holding (see more of Prem Watsa’s favorite stocks). In general, hedge funds disagreed with Buffett: the company took the #2 place on our list of the ten most popular healthcare stocks among hedge funds (see the full rankings). 72 funds and other notable investors owned the stock at the end of the second quarter, up from 61 at the end of the first quarter.

To cover the range of Johnson & Johnson’s businesses, we would begin by choosing The Procter & Gamble Company (NYSE:PG) and Kimberly Clark Corp (NYSE:KMB) as peers for the company’s personal products offerings. These two companies have very similar profiles when it comes to their earnings multiples: both trade at 19 times trailing earnings and 16 times forward earnings estimates- so, a premium on a forward basis, and a discount on a trailing basis (though some of that is likely due to the poor quarter for Johnson & Johnson that we’ve discussed). Procter & Gamble and Kimberly-Clark, meanwhile, showed substantial earnings growth last quarter compared to a year ago even though their revenues were about flat. Their dividend yields rival Johnson & Johnson’s, though their betas are lower. Therefore they may be better defensive plays.

We’d also consider Abbott Laboratories (NYSE:ABT) and Covidien plc (NYSE:COV) as peers, due to the former’s status as a pharmaceuticals producer and the latter’s medical devices business. These companies trade at 13 to 14 times estimated earnings for their next fiscal year, very much in line with Johnson & Johnson’s own multiple. Interestingly, both Abbott Labs and Covidien experienced a small increase in revenue but a greater than 10% decline in earnings in their most recent quarter versus the same period in the previous year. We also see somewhat lower dividend yields from these businesses.

Still, there’s really not enough of a gap between Abbott Labs, Covidien, and Johnson & Johnson to confidently recommend one over another. On a forward basis Johnson & Johnson seems a bit cheaper than Procter & Gamble or Kimberly-Clark, though it is more exposed to a bear market.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.