J&J - A Model Of Stability

We are reiterating our Buy recommendation on shares of Johnson & Johnson (JNJ). We believe J&J’s diverse and deep product mix, lack of cyclality, strong financial position, and consistent record of earnings growth will insulate it from a prolonged economic downturn.

While management’s guidance for 2009 was on the low side of our expectations, we believe J&J offers investors long-term value with low risk in the form of stable earnings and a diverse product portfolio. We also note that actual results can be highly influenced by the movement in foreign exchange rates.

J&J has held up well under a very difficult economic environment. We believe this is a testament to the diversity and strength of the underlying businesses, which should continue to provide strong growth in the future. In the near-term, the company’s “AAA” credit rating, large cash balance and product and geographic diversity should provide some downside protection in the event that economic conditions deteriorate further. The dividend currently yields 3.5%.

The shares currently trade at 11.6x our 2009 EPS estimate of $4.55. We model EPS to grow at a 4-year CAGR of 6% through 2012. We believe the shares remain undervalued given J&J’s strong financial position and ability to post solid growth even in times of severe macroeconomic stress.

We reiterate our Buy recommendation and have established a price target of $70, yielding 32% before dividend (currently yielding 3.5%). Our $70 price target implies a P/E multiple of 15.4x our 2009 EPS estimate.

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