JNJ Signals Uptrend on Attractive Valuations

JNJ Signals Uptrend on Attractive Valuations
April 25, 2017

To the surprise of investors and even speculators, the stock of consumer and pharmaceutical product manufacturer Johnson & Johnson (NYSE: JNJ) lost about 3% to close at $121.72 on April 18th. The steep drop in the share price was mainly due the fiscal 2017 first-quarter revenue that came below Wall Street’s expectations. However, a second look at the financial statement would reveal that the stock is trading at an attractive valuation and the dip should be used as an opportunity to take a long position in the stock, as explained below.

The New Brunswick, New Jersey-based company reported fiscal 2017 first-quarter revenues of $17.766 billion, up 1.6% from $17.482 billion in the similar period last year. The reported revenues missed Street consensus of $18.01 billion.

Net earnings in the recent quarter declined marginally to $4.422 billion or $1.61 per share, from $4.457 billion or $1.59 per share in the similar period last year. Excluding charges, the 1Q17 non-GAAP earnings increased to $5.04 billion or $1.83 per share, from $4.854 billion or $1.73 per share in first-quarter of 2016. The non-GAAP earnings surpassed Wall Street estimates of $1.77 per share.

At the outset, the results look unimpressive. However, it should be noted that the poor revenue growth was mainly due to slight weakness in the US sales. While the domestic sales grew 0.6% y-o-y to $9.38 billion, the international sales jumped 3.6% to $8.39 billion. The $30 billion acquisition of Swiss biopharmaceutical company Actelion, expected to complete in the current quarter, will certainly bolster the revenues of the company. That is one of the reasons for raising the earnings and revenue guidance for FY17.

The company stated that it now expects FY17 earnings to range between $7 and $7.15 per share, compared with a January forecast of $6.93 to $7.08 per share. Similarly, JNJ also raised the FY17 revenue outlook to a range of $75.4 billion to $76.1 billion, from the prior guidance range of $74.1 billion to $74.8 billion.

The company has an impressive track record of 33 years of consecutive earnings growth. Additionally, it holds the record for 54 years of consecutive dividend increases. Apart from Microsoft, it is the only company to have a AAA rating from Standard & Poor’s. Furthermore, it is one of those few companies which had reported an earnings growth during the 2008-2009 financial crisis. Thus, fundamentally, the stock is expected to reverse course in the days to come.

The price chart indicates that the stock has broken the major support level of 124 last week. On the downside, next major support exists at 119.30. The stock is expected to reverse after reaching that level. The argument for a trend reversal is also supported by the stochastic oscillator, which is in the oversold region. So, it would be wise on the part of a trader to initiate a long position in the stock.

JnJ - Technical Analysis - 25th April 2017

The equivalent of a long position can be opened in a binary market by purchasing a call option contract. The contract should be picked when the stock trades near $120.50. Choosing an expiry period of one week for the call option would ensure that the trader has higher chances of finishing the trade in the money.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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