J&J: Fairly Priced Core Holding

Johnson & Johnson’s (JNJ - Analyst Report) revenue growth in the next few years will likely slow relative to 2007 as a number of products are expected to experience declining sales. 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.

The company continues to contend with generic competition which will keep a lid on growth of its Pharmaceutical division over the next few years. Patents of schizophrenia drug Risperdal and epilepsy drug Topamax will expire in March 2009. The safety issues surrounding erythropoietin stimulating agents have also negatively affected sales of anemia drug Procrit. While the company has a number of late-stage candidates that are expected to be commercialized in the near-term, they will not begin to make a material impact until 2010 or 2011.

We expect the Consumer division to continue to perform particularly well in the next few years, but we think revenue growth in the Pharmaceutical division will struggle to exceed a Compound Annual Growth Rate of better than 3 percent. The Medical Devices division will continue to be a significant contributor to J&J’s top-line and is expected to grow substantially faster than pharmaceuticals despite the recent influx of competition to the Cordis division’s cardiovascular products.

We have established a price target of $72 per share, which implies a P/E multiple of 15.9x our 2008 EPS estimate of $4.53. Although at the current price we believe the shares are fairly valued, we view a price around $62 as an attractive point to begin accumulating the stock up to our target of $72.

Jason Napodano, CFA, contributed to this report.

Read the full analyst report on JNJ