Does Johnson & Johnson Support Higher Prices?

With shares of Johnson & Johnson (NYSE:JNJ) trading around $85, 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, manufacture, and sale of various products in the health care 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 health care products, Johnson & Johnson is able to support consumers and medical businesses around the world that continue to demand improved products.

Recently, the Defense Department has awarded two contracts to Johnson & Johnson, worth more than $62 billion all told. One is for $42.1 million, when the Department exercises the fifth of seven possible option-year extensions on a contract through which to provide the United States Army, Air Force, Navy, Marine Corps, and federal civilian agencies with “various medical and surgical products.” The other contract, worth $21.6 million, is connected with exercising the fourth of seven possible option-year extensions on a separate contract to supply like products to the same military branches and government agencies.

T = Technicals on the Stock Chart Are Mixed

Johnson & Johnson stock trended higher over the last several months. However, the stock is now pulling-back from all time highs as investors began to book gains. 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 between its key averages which signal neutral 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

21.64%

96%

93%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November 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 very 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

166.00%

-13.48%

1050.00%

-8.70%

Revenue Growth (Y-O-Y)

8.51%

8.46%

8.02%

6.54%

Earnings Reaction

0.00%

2.11%

-0.51%

1.38%

Johnson & Johnson has seen mixed earnings and rising 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), Novartis (NYSE:NVS), and sector?

Johnson & Johnson

Pfizer

Covidien

Novartis

Sector

Year-to-Date Return

22.14%

12.20%

14.07%

15.48%

14.96%

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

Conclusion

Johnson & Johnson provides valuable and essential health care products and services to many consumers and companies operating worldwide. The company recent acquired two large contracts that may be a positive catalyst for the stock. The stock has been trending higher recently but is now pulling-back from all time high prices. Over the last four quarters, earnings have been mixed while revenues have been rising, however, investors have been pleased during recent earnings announcements. Relative to its peers and sector, Johnson & Johnson has been a year-to-date performance leader. Look for Johnson & Johnson to OUTPERFORM.

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