Is Johnson & Johnson an Attractive Investment?

With shares of Johnson & Johnson (NYSE:JNJ) trading around $98, is JNJ an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Johnson & Johnson engages in the research and development, manufacturing, and sale of various products in the healthcare field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company offers a range of products used in general care, women’s health fields, nutritional and anti-infective, contraceptive, gastrointestinal, oncology, pain management, and vaccines. It also offers products to treat cardiovascular disease, orthopedic and neurological products, blood glucose monitoring and insulin delivery products, and general surgery products. Through its wide variety of healthcare products, Johnson & Johnson is able to support consumers and medical businesses around the world that continue to demand improved products.

Johnson & Johnson accepted a $4 billion offer from Carlyle Group LP made in January to acquire the healthcare products company’s only diagnostics division. The acceptance comes after consultation with relevant works councils and trade unions, New Brunswick, New Jersey-based J&J said in a statement Monday. The unit, for sale since November, had $1.89 billion in sales last year, or about 2.6 percent of J&J’s revenue. J&J has said that its goals are to be the first or second biggest in areas where it competes or to own businesses complementary to other J&J units. Monday was the deadline for J&J to accept the deal announced on January 16, the company said. J&J had received two other offers for the division, people familiar with the situation said in December: a joint bid from Blackstone Group LP and Danaher Corp., and a combined offer from CVC Capital Partners Ltd. and Leonard Green & Partners LP. The deal should close near the middle of this year, J&J said in its statement.

T = Technicals on the Stock Chart Are Strong

Johnson & Johnson stock has been trending higher in the past several years. The stock is currently trading near all-time highs and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Johnson & Johnson is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

JNJ

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Johnson & Johnson options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Johnson & Johnson options

16.21%

70%

68%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

April Options

Flat

Average

May Options

Flat

Average

As of Monday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Johnson & Johnson’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Johnson & Johnson look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

35.16%

-0.95%

166.00%

-13.48%

Revenue Growth (Y-O-Y)

37.09%

3.11%

8.51%

8.46%

Earnings Reaction

-1.08%

0.14%

0%

2.11%

Johnson & Johnson has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Johnson & Johnson’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Johnson & Johnson stock done relative to its peers – Pfizer (NYSE:PFE), Covidien (NYSE:COV), and Novartis (NYSE:NVS) — and sector?

Johnson & Johnson

Pfizer

Covidien

Novartis

Sector

Year-to-Date Return

7.18%

4.6%

7.80%

5.66%

7.31%

Johnson & Johnson has been a relative performance leader, year-to-date.

Conclusion

Johnson & Johnson provides valuable and essential healthcare products and services to many consumers and companies operating worldwide. The company accepted a $4 billion offer from Carlyle Group LP made in January. The stock has been trending higher in the past several years and is currently trading near all-time highs. Over the last four quarters, earnings have been mixed while revenues have been rising, which has pleased investors. Relative to its peers and sector, Johnson & Johnson has been a relative year-to-date performance leader. Look for Johnson & Johnson to OUTPERFORM.

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