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Dear Investors, 

Dear Investors,

Welcome to the ninth edition of our recently launched  TipRanks Smart Value Newsletter!

▣ The strong rally of the past two weeks propelled the S&P 500 out of correction territory and lifted investor spirits. However, the factors that nearly pushed stocks into a bear market – including trade policy flip-flops and economic uncertainty – have not disappeared, with bouts of volatility poised to return, driven by tariff headlines. This overhang continues to reduce visibility into earnings and valuations, leaving analysts at a loss as to how to factor near-total uncertainty into their outlooks. In this environment, we choose to look past near-term unknowns and focus instead on strong fundamentals and sound business models, recommending quality stocks when their prices reach attractive levels relative to their industries and historical trends.

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This Week’s Top Value Pick: Johnson & Johnson (JNJ)

Johnson & Johnson (JNJ) is a U.S.-based healthcare company specializing in pharmaceuticals and medical devices. Its operations focus on innovative drug development and surgical equipment manufacturing. Following the 2023 spin-off of its consumer health division, J&J has sharpened its focus on its core areas of expertise. The company remains one of the largest healthcare firms globally and a leading innovator in pharmaceuticals and medical technology.

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Healthcare Heritage

Johnson & Johnson was founded in 1886 by Robert, James, and Edward Johnson in New Brunswick, New Jersey, initially focusing on sterile surgical dressings, a pioneering innovation at the time. The company quickly expanded by introducing products like baby powder in 1894 and Band-Aid bandages in 1921, establishing itself as a leader in consumer healthcare.

In the mid-20th century, JNJ diversified into pharmaceuticals with the 1959 acquisition of McNeil Laboratories, gaining Tylenol, which became a cornerstone of its consumer health portfolio. The 1961 purchase of Janssen Pharmaceutical marked its entry into innovative drug development, leading to blockbuster drugs like Risperdal – used to treat mental health conditions – in the 1990s. These moves fueled revenue growth, with pharmaceuticals becoming a key driver by the 2000s.

The 21st century saw JNJ expand through strategic acquisitions. The 2006 purchase of Pfizer’s consumer healthcare business for $16.6 billion added iconic brands like Listerine, Bengay, and Neosporin, significantly expanding its consumer health segment before its 2023 spin-off. Despite challenges like talc litigation, JNJ’s focus on R&D, cost efficiencies, and global market expansion, particularly in emerging markets, has sustained its growth.

Today, with a market capitalization of over $376 billion and annual revenues (TTM) of more than $89 billion, JNJ ranks #42 on the Fortune 500 list.

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Strategic Synergies

Johnson & Johnson has strategically expanded its leadership in healthcare through a series of targeted mergers and acquisitions, particularly over the past decade. These moves have bolstered its Innovative Medicine and MedTech segments, enabling the company to support long-term growth across pharmaceuticals, biotechnology, and medical devices.

The company’s key acquisitions reflect a deliberate effort to diversify and strengthen its pipeline. The 2008 purchase of Mentor Corporation strengthened its Ethicon division’s surgical offerings, particularly in breast aesthetics, while the 2010 acquisition of Crucell expanded its vaccine capabilities, later supporting its COVID-19 vaccine development efforts.

In 2017, JNJ completed its largest deal by acquiring Actelion for $30 billion, adding leading pulmonary hypertension drugs Opsumit and Uptravi. In 2020, the $6.5 billion acquisition of Momenta Pharmaceuticals brought nipocalimab, expanding JNJ’s autoimmune disease portfolio. The 2022 acquisition of Abiomed for $16.6 billion added the Impella heart pump, enhancing its position in high-growth cardiovascular devices.

The momentum continued with strategic deals. In 2023, JNJ acquired Laminar for $400 million to expand its atrial fibrillation solutions. In 2024, it acquired Ambrx Biopharma for $2 billion, adding antibody-drug conjugate ARX517 to its oncology pipeline. That same year, it bought Shockwave Medical for $13.1 billion, gaining intravascular lithotripsy technology for cardiovascular applications, and Proteologix for $850 million to boost its immunology capabilities.

Other acquisitions included V-Wave ($600 million upfront, up to $1.1 billion in milestone payments), Yellow Jersey Therapeutics ($1.3 billion), and Intra-Cellular Therapies in 2025 for $14.6 billion. The latter added CAPLYTA, a neurological drug with FDA approval for schizophrenia and bipolar depression and potential approval for other major depressive disorders, with peak sales expected to exceed $5 billion.

Following the 2023 spin-off of its consumer health business into Kenvue, JNJ fully exited its stake in 2024. This restructuring marked a shift away from consumer health products and towards targeted healthcare innovation, reinforcing the company’s focus on high-value, science-driven growth opportunities in innovative medicine and medtech.

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Pharma Powerhouse

JNJ operates through two main segments: Innovative Medicine (pharmaceuticals) and MedTech (medical devices). The Innovative Medicine segment develops and sells drugs in areas like oncology, immunology, and neuroscience, with blockbusters like Darzalex generating significant revenue through global sales and patent-protected pricing.

Key growth drivers for the Innovative Medicine segment include Darzalex (used in the treatment of multiple myeloma), Tremfya (autoimmune diseases), and Spravato (depression). Tremfya is now positioned to potentially exceed Stelara in potential sales, exceeding $10 billion over the long term, with internal 2027 sales projections of $4.6 billion or more, 25% above Street estimates. Meanwhile, due to biosimilar competition, Stelara’s U.S. sales fell 34% in Q1. Eight biosimilars were launched in 2025 following patent expirations for Stelara. JNJ aims to offset this loss with Tremfya, Darzalex, and other high-growth products.

Spravato, a prescription nasal spray developed to treat depression, saw Q1 sales rise 43%, and JNJ expects 2027 sales in the range of $3 to $3.5 billion, more than 50% above the current $2.1 billion consensus. Oncology also remains a strong area, with Rybrevant + Lazertinib, a newly approved combination of chemotherapy-free regimen for the treatment of adults with non-small cell lung cancer (NSCLC), showing more than 100% sales growth after favorable Phase 3 data in NSCLC. JNJ projects sales of $3.6 billion for this combination by 2027, double the current Street estimates. Other oncology drugs like Carvykti saw sales more than double in Q1 and are projected to exceed $5 billion over the medium term. Talvey and Tecvayli also showed strong momentum, with Q1 sales rising 50.2% and 15%, respectively, driven by solid launches in relapsed refractory cancers.

Icotrokinra, an oral peptide for autoimmune conditions, has strong potential with an internal 2028 sales target of around $1.4 billion, double Street estimates. The peptide’s Phase 3 data showed nearly 50% complete skin clearance in psoriasis, with plans for FDA filing this year. Furthermore, positive Phase 2b results in ulcerative colitis suggests broader autoimmune potential for the peptide.

Additionally, the company has regulatory approvals for nipocalimab for generalized myasthenia gravis (a rare, chronic autoimmune disorder), and approvals for subcutaneous administration of Rybrevant for NSLC in the U.S., subcutaneous induction of Tremfya for ulcerative colitis, and Caplyta for adjunctive major depressive disorder are in the pipeline.

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MedTech Momentum

The MedTech segment focuses on surgical technologies, orthopedics, and cardiovascular solutions, earning income through hospital sales of devices like the Impella heart pump and robotic surgery systems.

JNJ’s MedTech pipeline remains robust, led by Ottava, a next-gen robotic surgical system now in clinical trials to support a U.S. FDA De Novo submission for upper abdominal procedures. A De Novo submission is an FDA pathway designed for low- to moderate-risk medical devices with no existing predicate, enabling approval based on novel clinical data rather than substantial equivalence to existing devices. In cardiovascular solutions, Varipulse, its pulsed field ablation (PFA) system for AFib, a common type of abnormal heart rhythm, resumed in the U.S. earlier this year after a brief pause due to off-label complications. Following updated guidelines and a Class I recall, the system has now completed over 5,500 procedures globally.

While cardiovascular and surgical technology show momentum, orthopedics remains a weak spot. In Q1, orthopedic revenue declined 3.1% year-over-year, impacted by restructuring efforts that include exiting low-margin markets and product lines. However, the company is repositioning the segment for growth, securing 185 FDA 510(k) clearances and expects to launch products like Velys Uni-Knee and Velys Spine.  A 510(k) FDA approval allows U.S. device makers to market moderate-risk products like orthopedic implants by showing they are substantially equivalent to an existing approved device.

To strengthen broader U.S. operations, the company  plans to invest $55 billion over four years in U.S. manufacturing, R&D, and technology, 25% more than the previous four years. This includes four new U.S. facilities, the first of which broke ground in March in North Carolina.

However, the MedTech division faces earnings headwinds from global trade dynamics. JNJ expects tariff-related costs of $400 million will impact its FY25 earnings, driven largely by U.S.-China export tariffs and limited pricing flexibility to offset these costs. Still, JNJ has upheld strong guidance, favoring tax incentives over tariffs to support domestic manufacturing.

Litigation continues to loom for the company as it faces over 58,000 lawsuits alleging its talc products caused cancer due to asbestos contamination, a claim the company denies. The company recently reversed $7 billion in legal reserves after three failed bankruptcy settlement attempts and now plans to contest the cases in court.

Despite macroeconomic uncertainties, JNJ considers healthcare to be relatively recession-resilient, supported by ongoing demand for medical procedures and pharmaceuticals. While elective procedures, particularly in orthopedics, may be delayed in a downturn, they are generally deferred rather than canceled, helping preserve long-term demand visibility.

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Financial Fortitude

JNJ has demonstrated solid financial performance over the past five years, with its revenues and EPS growing at a CAGR of 1.5% and 7%, respectively, driven by its diversified Innovative Medicine and MedTech segments, strategic acquisitions, and resilient management of legal and operational challenges.

In the first quarter of FY25, JNJ reported revenue of $21.9 billion and adjusted earnings per share (EPS) of $2.77, both of which surpassed analyst expectations. A key contributor was the acquisition of Intra-Cellular Therapies, which added Caplyta to the company’s neuroscience pipeline. Caplyta contributed an estimated $700 million in Q1 sales, though the acquisition diluted FY25 adjusted EPS by $0.25 due to integration and financing costs. The deal increased JNJ’s net debt to nearly $14 billion, bringing the total to $27.5 billion and pushing the debt-to-equity ratio to 0.67—well above the sector median of 0.3.

Another strategic acquisition, V-Wave, aimed at strengthening JNJ’s MedTech cardiovascular portfolio, is expected to dilute FY25 EPS by $0.06. Despite the earnings impact, both acquisitions are aligned with the company’s long-term growth strategy.

JNJ’s FY25 guidance reflects these developments. The company expects operational sales to grow 2.5% year-over-year to $92 billion at the midpoint, incorporating the contribution from Intra-Cellular, compared to its prior guidance of a sales growth in the range of 2% to 3%, excluding acquisitions. Adjusted EPS is projected to remain at $10.60 at the midpoint, effectively absorbing the $0.31 combined dilution from the Intra-Cellular and V-Wave deals, as well as $400 million in tariff-related costs. This outlook outpaces analyst expectations of $10.50 EPS on $90.3 billion in revenue.

The Innovative Medicine segment reported $13.9 billion in revenue in Q1, up 4.2% year-over-year, and accounted for 63% of total sales. Eleven key brands posted double-digit growth during the quarter. Darzalex sales surged over 20% to $3.3 billion, while Tremfya rose 20.1% to nearly $1 billion, benefiting from expanded indications for inflammatory bowel disease (IBD) and increased market share in psoriasis and psoriatic arthritis.

The MedTech segment generated $8 billion in revenue, representing a 4.1% increase year-over-year and 37% of total Q1 sales. Growth was driven by acquisitions such as Abiomed and Shockwave. Abiomed’s Impella heart pump delivered 14% sales growth, while Shockwave’s peripheral intravascular lithotripsy (IVL) catheter contributed $258 million in sales.

Despite the rise in leverage from recent acquisitions, JNJ remains financially robust. Net debt rose to $27.5 billion, largely due to the Intra-Cellular acquisition, which elevated the company’s debt-to-equity ratio. However, Johnson & Johnson retains a “AAA” credit rating from S&P, reflecting its conservative financial policies, strong free cash flow of $3.4 billion in Q1, and a diversified business model that supports financial stability amid increased borrowings and continued strategic investments.

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Value Vanguard

Johnson & Johnson has demonstrated a strong commitment to growing its dividends, underscored by 63 consecutive years of annual dividend increases. The latest hike, announced on April 15, 2025, raised the quarterly dividend by 4.8% to $1.30 per share from $1.24, bringing the annualized dividend to $5.20 and yielding approximately 3.21%, well above the healthcare sector average of 1.7%. Over the past decade, JNJ has increased its dividend at a compound annual rate of 5.7%. While the company does not provide a formal long-term dividend growth target, future increases are guided by earnings performance and strategic capital allocation priorities. The consistent growth in dividends is underpinned by Johnson & Johnson’s robust cash flow and financial stability.

In addition to dividends, JNJ employs share repurchases as part of its capital return strategy. The most recent buyback program, announced in 2022 for $5 billion, was fully executed by the first quarter of fiscal 2023. The company maintains a flexible approach to share repurchases, adjusting the pace based on market conditions and capital requirements. This flexibility is supported by JNJ’s strong balance sheet and a free cash flow margin of 20.8%, which ranks within the top 10% of the industry. Its operational efficiency is further reflected in its return on equity and return on assets, which are among the top 10% in the industry.

JNJ’s stock has experienced modest growth of 3% over the past year, reflecting its steady but unspectacular financial performance, cautious forward guidance, and broader market dynamics. The stock is trading at a P/E ratio of 15.4x, which is a 5.4% discount to the healthcare sector median, and is currently trading at an 8.8% discount to the company’s five-year average. Relative to its peers, JNJ is trading in a moderate valuation range, offering potential upside if earnings growth accelerates or market sentiment improves.

Wall Street analysts remain positive about the stock, citing JNJ’s strong Q1 results, management’s bullish commentary on long-term growth prospects for several key products, including Rybrevant, Spravato and Tremfya. Analysts have forecasted a 9.1% upside potential, with some analysts projecting gains of up to 19%. Furthermore, discounted cash flow models suggest JNJ is undervalued by over 50%.

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Investing Takeaway

Johnson & Johnson’s long-standing reputation as a healthcare leader, combined with its strategic pivot toward high-growth pharmaceutical and medtech innovation, makes it a compelling value play. The company’s diversified drug pipeline, robust acquisition strategy, and continued momentum in key therapeutic areas support long-term earnings visibility. While litigation and macroeconomic headwinds pose near-term risks, JNJ’s strong cash flow, disciplined capital allocation, and consistent dividend growth underscore its financial resilience. With the stock trading below historical and sector valuation averages, investors seeking stable income and long-term capital appreciation may find an attractive entry point in JNJ, particularly as market sentiment improves and innovation-driven growth accelerates.

• Category: Smart Value