A number of Johnson & Johnson, Inc. (NYSE: JNJ - News) products are expected to experience declining sales, slowing revenue growth in the next few years relative to 2007. Incremental earnings growth will come in the form of improving margins and share buybacks. Investment in J&J offers consistency, reliability, and perhaps safety in this volatile market. We consider the name a core holding.S&P also has a 5 Star Strong Buy rating on JNJ with a 12 month target price of $76.
Johnson & Johnson currently trades at 15.6x our 2008 EPS estimate of $4.52, somewhat richer than the large-cap pharmaceutical industry average of 13.6x. Historically, J&J has sold at a premium to the S&P 500 and pharmaceuticals. As such, we believe the current price makes J&J stock worth considering as a long-term investment and a core large-cap pharmaceutical holding. We believe the stock is correctly priced, and should post in-line returns over the next six-to-nine months.
We have established a price target of $75 per share, yielding 6% upside before dividend. Our $75 price target implies a P/E multiple of 16.6x our 2008 EPS estimate of $4.52. Although at the current price we believe the shares are fairly valued, we view a price around $65 as an attractive point to begin accumulating the stock.
Jason Napodano, CFA, contributed to the report.
Disclosure: The Div Guy owns shares of JNJ at the time of this post.