Can Johnson & Johnson Break Out?

With shares of Johnson & Johnson (NYSE:JNJ) trading around $93, 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 agreed to sell its K-Y lubricant products to the British consumer goods business Reckitt Benckiser Group, the company that produces the Durex line of condoms, for an undisclosed sum, Bloomberg reported Monday. The transaction doesn’t include any fixed assets or employees, and McNeill-PPC will continue to manufacture K-Y products, according to the Wall Street Journal. The exact terms of the transaction have not been released, although the deal is expected to close by mid-2014. Reckitt Benckiser’s acquisition will include global rights to the K-Y brand, which is available in more than 50 countries and generated more than $100 million from its products in 2013.

The Slough, Berkshire-based Reckitt Benckiser has continued to expand its line of consumer health labels through acquisitions during the past two years. The acquisition of K-Y “is just another small step to a bigger and bigger piece of the pie in consumer health,” Bernstein analyst Andrew Wood said Monday in a statement, per Bloomberg. Rumor has it that Reckitt Benckiser has been eyeing Merck’s (NYSE:MRK) over-the-counter drugs business, as well, according to sources who spoke with Bloomberg; the company is said to have plans to become an “aggregator” in the consumer health market as companies continue to consolidate different segments of the industry.

T = Technicals on the Stock Chart Are Strong

Johnson & Johnson stock has been trending higher in the past several years. However, the stock is currently trading sideways and may need time to consolidate before heading higher. 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 signal 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

15.82%

16%

14%

What does this mean? This means that investors or traders are buying a minimal 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 today, there is an 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 minimal 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 = Weak Relative Performance Versus Peers and Sector

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

Johnson & Johnson

Pfizer

Covidien

Novartis

Sector

Year-to-Date Return

1.88%

6.06%

4.71%

2.92%

4.89%

Johnson & Johnson has been a poor relative performer, year-to-date.

Conclusion

Johnson & Johnson provides valuable and essential healthcare products and services to many consumers and companies operating worldwide. The company agreed to sell its K-Y lubricant products to the British consumer goods business Reckitt Benckiser Group. The stock has been trending higher in the past several years, but is currently trading sideways. 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 poor year-to-date performer. WAIT AND SEE what Johnson & Johnson does this quarter.

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