JNJ — Johnson & Johnson | Value Investing Lab

Decision Matrix

Buffett

Graham

Sowell

Framework Convergence

—

Graham Score

—

Buffett Score

ALCISTA

Sowell Verdict

HOLD

Combined Signal

Graham

PASS

Security Analysis

—

Buffett

HOLD

Buffettology

—

Sowell

ALCI

Basic Economics

ALCISTA

Bull / Bear Assessment

✅ Bull Case

Natural monopoly
Full cost pass-through
Framework Conflict Resolution

⚠️ Bear Case

Exceptional Business — Excessive Price
All three frameworks agree: Johnson & Johnson is a world-class franchise operating efficiently.
However, at $253, the stock price has priced in the next decade of growth, leaving no margin of safety.
Benjamin Graham

Buffett Signal

⚠️ HOLD — Overvalued at Current Price

Durable competitive advantage confirmed, but price cannot deliver 15% annual returns. Wait for $105-150 range.

Durable Competitive Advantage

67.9%

Gross Margin

32.9%

ROE

AAA

Credit Rating

140yr

Heritage

Brand Recognition: 140-year heritage; globally recognized.

Low Competition: #1/#2 in immunology, oncology, surgery, orthopedics.

Conservative Financing: AAA credit (1 of 2 in US).

Upward Earnings: Adj EPS $6.73 → $10.82 over 10 years (+61%).

Share Buybacks: $75.6B treasury stock.

Initial Rate of Return

IRR = $10.82 ÷ $253.04 = 4.28%
Threshold: 5% minimum
Verdict: FAIL — IRR below 5% minimum

CAGR Analysis

All CAGR metrics fall well below Buffett's 15% threshold. JNJ is a predictable mid-single-digit grower — excellent for stability but insufficient for Buffett-level compounding returns.

Verdict: FAIL — CAGR below 15%

Income Statement & Balance Sheet

67.9%

Gross Margin

3.8%

Interest/OpIncome

0.75

D/E Adjusted

1.47 yr

Debt Payoff

Margins: Gross Margin 67.9% exceeds 40% threshold. SGA/GP of 37% slightly above ideal <30% but reflects pharma complexity.

Debt: D/E Adjusted 0.75 (below 0.80 threshold). Could retire all debt in 1.47 years.

Cash Flow & CAPEX

$19.7B

FCF

~54%

CAPEX/Earnings

FCF of $19.7B is massive and consistent. CAPEX/Earnings ~54% slightly above Buffett's 50% ideal, reflecting manufacturing and R&D infrastructure needs.

Verdict: CAUTION — CAPEX slightly above threshold

M&A Assessment

Recent acquisitions follow Buffett's "consumer monopoly + consumer monopoly" rule:

• Intra-Cellular Therapies ($14.6B, 2025) — CNS monopoly

• Abiomed ($16.6B, 2022) — Heart pump technology leader

• Kenvue separation (2023) — Strategic refocusing

Verdict: PASS — Intelligent capital allocation

Buffett Scorecard

Gross Profit Margin

PASS

67.9%

>40%

SGA/GP Ratio

CAUTION

37.0%

<30%

R&D/GP Ratio

PASS

23.1%

<25%

Interest/Operating Income

PASS

3.8%

<10%

Earnings Predictability

PASS

Stable uptrend

No erratic

IRR (Earnings Yield)

FAIL

4.28%

>5%

EPS CAGR

FAIL

5.4%

>15%

CAPEX/Earnings

CAUTION

~54%

<50%

Capital Allocation

PASS

Intelligent M&A

Rational

Durable Advantage

PASS

AAA, 140yr, #1/#2

Yes

Score: 6 PASS / 2 FAIL / 2 CAUTION — Excellent business, price is the problem.

← Main Page Análisis Graham Buffett Sowell Metodología About

Johnson & Johnson (JNJ)

Security Analysis — Benjamin Graham Method

6th Edition Framework • Healthcare / Large Cap Pharmaceutical

⚠️ SPECULATION — BY PRICE

Excellent company; current price far exceeds investment value. Speculative component is dominant.

Graham Intrinsic Value Thermometer

$74.72

BARGAIN

$112.09

NORMAL VALUE

$179.34

MAX INVESTMENT

$253.04 ← YOU ARE HERE

OVERVALUED ZONE

Step 1: Average Adjusted EPS (10 years, 2016-2025) = $8.97

($6.73+$7.30+$8.18+$8.68+$8.03+$9.80+$10.15+$10.00+$9.98+$10.82) ÷ 10

Step 2: Normal Value = $8.97 × 12.5 = $112.09

(What the stock is WORTH under normal conditions)

Step 3: Bargain Price = $112.09 × 0.667 = $74.72

Investment vs. Speculation Classification

"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

Classification: SPECULATION — BY PRICE. Johnson & Johnson is an exceptional business — stable earnings, AAA-rated credit, 64 consecutive dividend increases, dominant market position. However, at $253.04, the price is 28.2x the 10-year average adjusted EPS of $8.97, far exceeding Graham's maximum 20x threshold. The speculative component ($253.04 - $179.34 = $73.70/share) represents 29% of the current price.

Sources: stockanalysis.com (Jul 17, 2026), macrotrends.net (Jul 17, 2026), JNJ Q2 2026 Earnings Release (Jul 15, 2026)

Graham Verdict: FAIL — Price exceeds 20x average earnings

Earning Power Analysis (10-Year Record)

"Earning power must imply a reasonably confident expectation of future results — not merely past averages."

Year Revenue ($M) Net Income ($M) GAAP EPS Adjusted EPS

2016 71,890 16,540 $5.93 $6.73

2017 76,450 1,300 $0.47* $7.30

2018 81,581 15,297 $5.61 $8.18

2019 82,059 15,119 $5.63 $8.68

Income Statement Deep Dive

"The SOURCE of earnings is more important than the earnings themselves."

Gross Margin Stability: Gross margins have been remarkably consistent: 70.3% (2021), 69.3% (2022), 68.8% (2023), 69.1% (2024), 67.9% (2025). Slight compression from 70%→68% range reflects product mix shift post-Kenvue (higher-margin consumer products removed).

Interest Coverage: EBIT of $25.5B vs. interest expense of $971M = 26.3x coverage. This massively exceeds Graham's 3.0x minimum for industrials. Even in the worst year (2020), operating income of ~$17B would provide >17x coverage.

R&D Investment: $14.7B in 2025 (15.7% of revenue) — reflects commitment to innovation pipeline.

Non-Recurring Items: 2025 included $7.0B gain from reversal of talc litigation reserve. Excluding this, operating earnings remain robust at ~$19.8B.

Sources: stockanalysis.com income statement (Jul 17, 2026), JNJ 2025 10-K

Balance Sheet Analysis — Asset Value

"When a stock sells persistently below liquidating value, either the price is too low OR the company should be liquidated."

Net Current Assets/Share

Asset Analysis (FY2025, $M):

Category Amount ($M) Per Share

Total Assets 199,210 $82.66

Goodwill 48,772 $20.24

Debt and Financial Structure Analysis

"Bond safety depends on EARNING POWER, not property value."

Debt Structure (FY2025):

• Short-term debt: $8.5B

• Long-term debt: $39.4B

• Debt-to-equity: 0.59x

✅ LT Debt Payoff: $39.4B ÷ $26.8B net income = 1.47 years (PASSES Graham's 3-4 year maximum)

Intrinsic Value Calculation

"Security analysis does not seek to determine EXACTLY what the intrinsic value is. It needs only to establish that value is adequate or considerably higher/lower than market price."

Method: Graham's Earning Power Valuation

Normal Earning Power: $8.97/share (10-year adjusted average)

Recent Earning Power: $10.15/share (5-year adjusted average)

Current/Forward: $11.68/share (2026 guidance midpoint)

Conservative Estimate (10yr avg × 12.5): $8.97 × 12.5 = $112.09

Comparative Analysis

"A stock selling at half the valuation of its peers demands investigation."

Company Market Cap P/E Ratio Yield Op. Margin

$609B

29.4x

2.14%

27.1%

$1,110B

40.1x

0.6%

~32%

$450B

25.0x

3.1%

~27%

$315B

23.3x

2.8%

~28%

Qualitative Factor Assessment

"The market tends to value 'good management' TWICE — once in superior earnings, again as a separate premium. This causes overvaluation."

Business Stability: ✅ Healthcare is inherently stable — people need medicines and medical devices regardless of economic conditions. JNJ's diversification across Innovative Medicine and MedTech provides resilience.

Competitive Position: ✅ Market-leading positions in immunology (STELARA, though losing exclusivity), oncology (DARZALEX, ERLEADA), surgery, orthopedics. Strong patent portfolio.

Management Quality: ✅ CEO Joaquin Duato executing well on post-Kenvue strategy. 2026 guidance raised. Revenue on track to exceed $100B.

Industry Outlook: ✅ Favorable — aging global population, innovation in biologics, MedTech growing above market. Pipeline includes 15+ potential blockbusters in Phase 3 or filed.

Key Risk — STELARA Patent Cliff: ⚠️ STELARA (immunology, ~$21B peak sales) facing biosimilar competition starting 2025. JNJ guiding to offset with new launches (TREMFYA, NIPOCALIMAB, etc.).

Dividend and Shareholder Policy

"A dollar of retained earnings should produce more than a dollar of market value over time."

Consecutive Increases

Dividend History: JNJ is a "Dividend King" — 64 consecutive years of increases (announced April 14, 2026). Latest increase: 3.1% to $1.34/quarter ($5.36 annual). The payout ratio on adjusted earnings (~47%) is sustainable and leaves ample room for reinvestment.

Capital Return: JNJ generates ~$19.7B in free cash flow annually. Dividends consume ~$12.5B, leaving ~$7.2B for R&D reinvestment, acquisitions, and modest buybacks. ROE of 25.9% suggests retained earnings are being deployed at attractive returns.

Recent Acquisition: $14.6B acquisition of Intra-Cellular Therapies (2025) for CAPLYTA — demonstrates continued reinvestment in growth.

Sources: JNJ press release (Apr 14, 2026 via jnj.com), stockanalysis.com (Jul 2026), Motley Fool (Jul 14, 2026)

Special Situations and Warning Signs

"Compare reported earnings to income tax payments — taxes don't lie."

Accounting Quality Check:

✅ Effective tax rate 17.7% (2025) — consistent with prior years and pharma norms

✅ Free cash flow ($19.7B) closely tracks adjusted net income (~$26.3B) — earnings are cash-backed

⚠️ Goodwill ($48.8B) and intangibles ($50.4B) represent 50% of assets — acquisition-heavy strategy creates impairment risk

⚠️ $7B talc reserve reversal boosted 2025 non-operating income — this is non-recurring

← Main Page Análisis Graham Buffett Sowell Metodología About

Johnson & Johnson (JNJ)

Macroeconomic & Microeconomic Analysis

Thomas Sowell "Basic Economics" Framework • 10-Phase Assessment

Transparent price signals, natural monopoly, efficient resource allocation

Heavy factors: 3 bullish, 0 bearish | Standard factors: 5 bullish, 2 bearish | Net: ALCISTA

Critical Scarce Resources

"Economics is the study of the use of scarce resources which have alternative uses." — Sowell

Resource % Cost Trend Substitutes Risk

Pharma R&D Talent ~15% Rising Low MED

Active Pharma Ingredients ~12% Stable Multiple LOW

Biologics Manufacturing ~18% Rising Limited MED

Medical Device Components ~10% Stable Moderate LOW

Supplier Mapping

"When a supplier operates as a monopoly, the purchasing company inherits systemic risk."

Input Market Structure Key Suppliers Risk

API Manufacturing Competitive Lonza, Catalent, CDMOs LOW

Drug Delivery Oligopoly BD, Gerresheimer MED

Device Materials Competitive Multiple titanium/polymer LOW

Biologics CDMOs Oligopoly Samsung Bio, Lonza, WuXi MED

Price Signals — Pass-Through Test ★

"Prices are signals that transmit information, create incentives, and ration scarcity — simultaneously."

Signal Direction Cause Impact

Input Costs (COGS) Rising (+5.5%) Biologics scale-up, talent Moderate pressure

Product Pricing Rising (+6.1%) New launches, specialty mix POSITIVE

Gross Margin Stable (~68%) Pricing power offsets inflation POSITIVE

🔑 PASS-THROUGH TEST: CAN JNJ PASS ON COSTS? → YES

Incentives and Opportunity Cost

"Costs are foregone opportunities, not government expenditures."

Investor Opportunity Cost: JNJ ~5.3% projected return vs S&P ~10% historical — unfavorable at current price.

Management Incentives: ✅ Capital allocation rational (Kenvue divest, Intra-Cellular acquisition). ✅ R&D follows demand signals. ⚠️ Some bureaucratic lag inherent at $600B+ scale. [INFERRED]

Sowell: Management aligned, but investor opportunity cost unfavorable at $253. Standard weight: BEARISH.

Government Intervention ★

"A subsidy artificially keeps capital in a sector where real demand doesn't justify its presence."

Intervention Impact Effect

Patent System 20-year drug exclusivity POSITIVE barrier

FDA Approval ($2.6B/drug) Blocks small competitors POSITIVE barrier

IRA Price Negotiations Medicare drug price caps NEGATIVE margin

R&D Tax Credits ~$500M benefit (est.) MINOR (<5% income)

Systemic Risk

"The vulnerability of one market is the vulnerability of the entire system."

Geographic: US 52% | Europe 22% | APAC 15% | ROW 11% [CONFIRMED — JNJ 10-K]

Systemic Check: ✅ No single-failure supplier | ✅ Inelastic healthcare demand | ✅ AAA credit = zero credit dependency | ✅ Multiple manufacturing sites globally

Override Status: NOT TRIGGERED. No contagion/interconnectivity risk detected.

Sowell: LOW systemic risk. Defensive sector, geographic diversification, AAA credit eliminate contagion concerns.

Competition — Natural vs. Artificial Monopoly ★

"Competition forces innovation; lack of competition breeds stagnation."

Segment Position Competitors Pricing Power

Innovative Medicine #2 globally Lilly, AbbVie, Merck HIGH

MedTech (Surgery) #1 globally Medtronic, Stryker HIGH

MedTech (Ortho) #2 globally Stryker, Zimmer MODERATE

🔑 CLASSIFICATION: NATURAL MONOPOLY — Dominates through clinical innovation, not government license. If all regulation vanished, JNJ maintains dominance through product superiority. NOT a "Hindustan Ambassador" situation. [CONFIRMED — Q2 2026 "double-digit growth ex-STELARA" via CNBC Jul 15, 2026]

Scale & Efficiency

"Size ≠ efficiency. The question: does the NEXT dollar of growth reduce or increase cost per unit?"

✅ Revenue growing ($94B→$101B) with stable margins = STILL in economies of scale | ✅ Post-Kenvue specialization improves focus | ✅ Operating leverage: revenue +6.1%, operating income +21.3% (2025) — next dollar is highly accretive

Sowell: Operating in ECONOMIES OF SCALE zone. Post-restructuring specialization = efficient resource use.

Profits, Losses & Management

"Profits incentivize efficiency; losses force correction of errors. BOTH are essential."

Profit Source: REAL demand (patients needing treatments) ✅ | Corrective Forces: Biosimilar competition forces innovation ✅ | Kenvue separation was healthy correction ✅ | Talc failure forced strategic pivot ✅

Management: CEO compensation tied to operations ✅ | 2026 guidance raised ✅ | Capital allocation disciplined ✅

Sowell: Profits from real demand. Losses/competition forcing healthy corrections. Aligned management.

Verdict Aggregation

Pass-Through Test HEAVY ×2 BULLISH ✅

Natural vs Artificial Monopoly HEAVY ×2 BULLISH ✅

Subsidy Dependency HEAVY ×2 BULLISH ✅

Supplier Structure Standard ×1 BULLISH

Geographic Diversification Standard ×1 BULLISH

Management Alignment Standard ×1 BULLISH