This Medical Giant's Stock Rebounds: A 15% Upside Is the Minimum

July 17, 2024 at 10:52 AM EDT

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Johnson & Johnson (NYSE: JNJ) has struggled for the last year or two as the impacts of COVID-19 and the spin-off of Kenvue (NYSE: KVUE) work their way through the system. The takeaway from the Q2 earnings release is that organic growth is back in the picture. Reported revenue is down compared to last year because of the Kenvue spin-off. Still, the shift to sequential growth is a positive signal compounded by a recent acquisition and a robust pipeline that promises to drive results for this healthcare company over the next few years.

Johnson & Johnson Reports Strong Quarter, Gives Mixed Outlook

Johnson & Johnson had a solid quarter with strength in all major operational categories. The $22.4 billion is up 4.3% on a continuing operations basis, 20 basis points better than expected, with operational growth of 6.6% and ex-COVID of 7.1%. Strength was driven by sales in the U.S., which are up 7.6% compared to the 5.3% gain internationally; Innovative Medicine grew by 8%, leading MedTech’s 4% increase.

The margin is another area of strength. The company experienced a GAAP loss due to one-offs and non-cash impairments, but the damage was less than expected, leaving the adjusted results ahead of the consensus. The adjusted EPS of $2.82 grew by 10.2% to outpace the top-line strength and drive robust cash flows. Cash flows are prioritized for growth, dividends, and repurchases, which are part and parcel of the share price outlook. The company did not report any repurchases for Q2, but activity in the last year reduced the average diluted count by more than 7%, aiding the bottom line's strength.

Johnson & Johnson JNJ stock chart

Guidance is mixed but favorable to investors. The company raised its guidance for reported and operational growth, but the operational figure is shy of the consensus. The salient detail is that adding Shockwave Medical and Proteologix to the portfolio will boost revenue and earnings above the consensus, resulting in favorable revisions from the analysts.

Analysts and Institutions Provide a Tailwind for JNJ Stock Price

The analysts' activity in JNJ is light this year but bullish for the stock price. The consensus rating of Hold has been firm for at least twelve months while the consensus price target edged higher. The most recent revisions were released less than two weeks before the Q2 release, reiterating an Overweight rating and a $215 price target. The $215 target is the highest on Wall Street and is leading the market into the high end of the analysts' range: consensus is good for a 15% gain, while the range’s high end adds another 22% upside.

Institutional activity is mixed in 2024 but shows a shift that will provide another tailwind for this market. The institutional activity was tilted to the downside in Q1, aiding the decline in the share price, but shifted to net-buying in Q2. The trend continued into Q3 and is gaining momentum. Recent buyers include numerous small wealth managers, evidence of the stock's growing appeal.

Johnson & Johnson Dividend is Safe and Growing

Johnson & Johnson’s dividend is attractive, with the shares trading near long-term lows. The annualized payout of $4.96 is worth about 3.3% in yield, which is near a fifteen-year high. The distribution is expected to grow, sustaining the mid-single-digit CAGR run the last few years, but the yield will not last. JNJ trades at a deep discount on its historic P/E, which should be expected to diminish over the coming years.

Shares of JNJ are up more than 2% on the Q2 news, confirming support at the critical level. The market is above near-term resistance and indicated higher with a chance of gaining $5 in the next few days and $10 to $15 over the coming weeks and months. Assuming the Q3 results align with the outlook, earnings and analysts' revisions should drive this market back to record levels by the end of the year.