revenue grows at a 3% CAGR from 2022 – 2031 (equal to consensus estimate CAGR from 2022 – 2024), then.NOPAT margin falls to 22.3% (three-year average) from 2022 – 2031, and.In this scenario, Johnson & Johnson earns $19.5 billion in NOPAT in 2031, which is 10% below its 2021 NOPAT. The stock is worth $185/share today – equal to the current stock price. 2022 – 2024 consensus estimate CAGR of +3%) compounded annually from 2022 – 2031, then NOPAT margin falls to 21.7% (five-year average vs.Such an assumption seems overly pessimistic, given the company grew NOPAT by 5% compounded annually over the past decade.īelow I use my reverse discounted cash flow (DCF) model to analyze two future cash flow scenarios and highlight the upside potential in Johnson & Johnson’s current stock price.ĭCF Scenario 1: to Justify the Current Stock Price of $186/share. Johnson & Johnson’s PEBV ratio of 0.9 means the stock is priced for profits to permanently fall 10% below 2021 levels.
JNJ Has 32%+ Upside If Consensus Is Correct Even if more governmental healthcare policies are enacted, it is not a given that they would negatively impact Johnson & Johnson’s profits. Since the Affordable Care Act was passed into law in 2010, Johnson & Johnson’s NOPAT margins rose from 21% in 2009 to 23% in 2021 as the company’s NOPAT grew 67%. After Medicare Part D went into effect on January 1, 2006, Johnson & Johnson received $615 million of revenue from the plan while improving its NOPAT margin improved from 19% in 2005 to 20% in 2007. Though threats of government price controls pressure Johnson & Johnson’s stock, the company has proven to profitably operate in a variety of political environments. with health insurance rose from 244 million in 2001 to ~301 million in 2021 and is expected to reach ~319 million in 2030.Ī Strong Performer in Multiple Environments In the U.S., the number of individuals 65 and over is expected to grow from 54 million in 2020 to 65 million by 2025.Īdditionally, the growing number of people covered by health insurance contributes to higher healthcare expenditures. is aging, and that trend will drive increased healthcare expenditures, including pharmaceuticals, for individuals 65 and over. Long-term Tailwinds Will Drive Pharmaceutical Demandįavorable demographic and health insurance coverage trends will drive continued demand for pharmaceuticals over the long run.
The company’s pharmaceutical and medical devices segments are focused on ten different therapeutic and product areas, the largest of which, Oncology, accounts for just ~19% of total revenue. By separating the consumer health segment from the rest of the business, Johnson & Johnson hopes to become even more profitable over the long run.Īfter the separation, Johnson & Johnson will remain a highly diversified business. While the company’s reported earnings before tax rose from $17.7 billion in 2017 to $22.8 billion in 2021, earnings before tax from the consumer health segment fell from $2.5 billion to $1.3 billion over the same time. After the segments separate, Johnson & Johnson expects pharmaceutical sales to account for ~65% of total revenue compared to 56% in 2021. Consumer health accounted for 16% of total revenue in 2021, but just 6% of total income before tax.
I view the risk from the increase in business concentration as more than offset by the benefits of focusing resources on where its competitive advantages – and profits - are greatest. In November of 2021, Johnson & Johnson announced plans to spin off its consumer health segment, which raised concerns that the company will become overly concentrated in the remaining lines of business. Spinoff Creates a More Focused and Profitable Company
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