Is Johnson & Johnson's Stock Overvalued Or Undervalued?

Johnson & Johnson JNJ shares have lagged the S&P 500 in 2021, generating a year-to-date total return of just 3.6%.

Johnson & Johnson has gotten plenty of headlines for its COVID-19 vaccine, but investors may be wondering just how much value is left in the pharma giant’s stock?

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 33.4, more than double its long-term average of 15.9.

Johnson & Johnson’s PE is currently 23.9, significantly below the S&P 500 average as a whole. Johnson & Johnson's PE ratio is up 15.6% over the past five years, suggesting the stock is currently priced at the high end of its historical valuation range.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.3. Johnson & Johnson’s forward earnings multiple of 15.2 is still well below the multiple of the S&P 500 as a whole, making Johnson & Johnson stock look undervalued.

Johnson & Johnson’s forward PE ratio is even slightly lower than its financial sector peers, which are currently averaging a 16.9 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Johnson & Johnson’s PEG is 2.6, suggesting Johnson & Johnson is currently overvalued after accounting for its modest growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.08, well above its long-term average of 1.62. Johnson & Johnson’s PS ratio is 4.7, more than 50% higher than the S&P 500.

Finally, Wall Street analysts see value in Johnson & Johnson stock over the next 12 months. The average analyst price target among the 16 analysts covering Johnson & Johnson is $188.05, suggesting about 17.1% upside from current levels.

The Verdict: At its current price, Johnson & Johnson stock appears to be reasonably valued based on a sampling of common fundamental valuation metrics.

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