Is Johnson & Johnson Enticing After Recent Headlines?

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 health care products, Johnson & Johnson is able to support consumers and medical businesses around the world that continue to demand improved products.

Johnson & Johnson reported fourth-quarter profit that beat analysts’ estimates as demand for the company’s newest drugs accelerated. Net income gained 37 percent to $3.52 billion, or $1.23 a share, from $2.57 billion, or 91 cents, a year earlier, the New Brunswick, New Jersey-based company said today in a statement. Earnings excluding one-time items beat by 4 cents the $1.20 average of 16 analysts’ estimates compiled by Bloomberg. J&J has brought new medicines to the market the past two years while it integrated the 2012 acquisition of closely held device maker Synthes Inc., the largest purchase in company history.

Last week, the company received a $4.15 billion offer for its lone diagnostics division from Carlyle Group LP, following competitors such as Pfizer Inc. in divesting units that aren’t market leaders. “Proceeds from the diagnostic division sale could spur more mergers and acquisitions and stock buybacks,” said Glenn Novarro, an analyst with RBC Capital Markets in New York, in a note. “With the integration of Synthes now largely behind Johnson & Johnson, we believe the company could become more aggressive in 2014.”

T = Technicals on the Stock Chart Are Mixed

Johnson & Johnson stock has been exploding to the upside in the past several years. However, the stock is currently trading sideways and may need time to stabilize 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 between its rising 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

14.96%

3%

0%

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

Put IV Skew

Call IV Skew

February Options

Average

Average

March Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral 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 Increasing 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

-2.26%*

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.

* As of this writing

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

1.48%

1.70%

0.66%

1.07%

2.22%

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 reported fourth-quarter profit that beat analysts’ estimates as demand for the company’s newest drugs accelerated.  The stock has been exploding to the upside 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 led to positive feelings among investors about 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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