Johnson & Johnson Stock appears undervalued

Wall Street Choice: Johnson & Johnson Stock appears undervalued

Herb Saftlas

Equity analyst

Standard & Poor’s

Stock: Johnson & Johnson (JNJ)

Rating: Accumulate

Quality ranking: A+

The shares of the world’s largest healthcare company have fallen 6.8 percent this year through Aug. 19 vs. a 13.9 percent rise in the S&P 500. We attribute this weakness to investor concern over Johnson & Johnson’s decelerating revenue and earnings growth rates. Although these concerns are somewhat justified, the stock now appears to be undervalued relative to its peers, given its estimated long-term growth rate.

During the first half of 2003, Johnson & Johnson’s pharmaceuticals segment was hurt by lower revenues from Procit/Eprex, a drug that stimulates the production of red blood cells. It accounted for 12 percent of 2002 sales.

Over the past two years, Procit/Eprex generated annual sales growth in excess of 20 percent. However, we continue to anticipate that the recent launch of the Cypher drug-coated coronary stent, steady growth in the consumer products segment and contributions from recent acquisitions will allow Johnson & Johnson to generate 2003 sales growth of about 10 percent, excluding the effects of currency translations.

We forecast earnings of $2.62 per share for 2003 and $3 for 2004. Our 2003 S&P core earnings forecast – which excludes inprocess R&D, estimated stock option expense and projected pension costs-is $2.20.

Our 12-month target price for the stock is $60, or 20 times our 2004 forecast. At that level, the shares would be valued at a slight premium to their pharmaceutical peers. We believe the premium is justified by the company’s exposure to higher-growth medical device and biotechnology markets.

Copyright CPS Communications Sep 2003

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