Johnson & Johnson May Rise 9% on Better Growth

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Johnson and Johnson's (JNJ) stock has surged by 12% over the past three months. Now shares of the pharmaceutical giant may go higher, by another 9% based on technical analysis.

The company delivered better than expected second quarter results, beating on both the top and bottom lines. Earnings came in at $2.10 per share, almost 2% better than estimates. Revenue was over 3% better, at $20.8 billion driven by strong growth in its pharmaceutical business. The better than expected results have helped to spark the stock’s recent rise. However, the stock may be too cheap given its historical valuation.  

JNJ data by YCharts

Nearing a Technical Breakout

Johnson and Johnson's stock started trending higher around the end of June. Now the stock is sitting at a technical resistance level around $137. If shares rise above resistance, the stock could increase to around $148.25. That would be a rise of 9% from its current price of $135.95. (For more, see also: Johnson & Johnson: A Dividend King.)

The relative strength index (RSI) has been trending higher, suggesting bullish momentum is moving into the stock. Currently, the RSI is not indicating shares are overbought, with a reading below 70 at roughly 64. It too suggests the stock has further room to rise.  

Improving Growth

One reason why investors have been buying shares is the strong earnings and revenue growth forecast for 2018. Earnings estimates are forecast to climb by 11% to $8.14. Meanwhile, revenue forecasts are calling for an increase of more than 6% to $81.2 billion. These estimates are up since the beginning of the year when earnings estimates were for $7.84 on revenue of $80.5 billion.  

Earnings growth should continue in 2019 and 2020, and are forecast to rise by roughly 6% each year. Meanwhile, revenue is estimated to continue to grow by 3% in 2019 and by more than 4% in 2020. (For more, see also: How Johnson & Johnson Became a Household Name.)

Cheap Valuation

Fundamental Chart data by YCharts

The improving earnings outlook has helped to lower the company's valuation. Shares are currently trading at 15.7 times 2019 earnings estimates of $8.60. Since 2015, the stock has traded in a range of 14 and 18 times one-year forward earnings. The current valuation puts shares on the lower end of that historical range.  

There is no doubting that growth has returned to Johnson and Johnson's business. If the company can continue to deliver strong results and beat expectations, shares should continue to climb.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.