Stock Analysis

Johnson & Johnson (NYSE:JNJ) Not Lagging Market On Growth Or Pricing

NYSE:JNJ
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With a price-to-earnings (or "P/E") ratio of 26.6x Johnson & Johnson (NYSE:JNJ) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Johnson & Johnson as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Johnson & Johnson

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NYSE:JNJ Price Based on Past Earnings August 31st 2020
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How Is Johnson & Johnson's Growth Trending?

In order to justify its P/E ratio, Johnson & Johnson would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 5.7%. This means it has also seen a slide in earnings over the longer-term as EPS is down 4.3% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 23% during the coming year according to the analysts following the company. With the market only predicted to deliver 5.2%, the company is positioned for a stronger earnings result.

With this information, we can see why Johnson & Johnson is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Johnson & Johnson's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Johnson & Johnson that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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