If you are standing at a crossroads with Johnson & Johnson’s stock, you are not alone. The past several months have given investors plenty to think about, especially as J&J continues to find its footing amid policy headlines and global market shifts. The stock recently closed at $179.29, reflecting a 12.5% gain over the past year and a steady climb of 33.8% in five years. Those are numbers that catch attention, but the real question is what they say about the future value for new and existing shareholders. Lately, the market has had to weigh multiple pieces of policy news, from potential pharmaceutical tariffs to discussions about medicine pricing abroad. While policy talk can rattle stocks like J&J, the major moves on tariffs have been slower to arrive than first hinted. This appears to have eased the immediate risk premium and allowed some growth optimism to reappear in J&J’s share price. Adding in speculation about adjustments to the patent system, it is clear that a mix of uncertainty and possibility is in the air. The market is digesting these factors in real time. Now, before you make your next move, let us dig deeper into whether J&J is truly undervalued. According to our valuation checks, the company earns a score of 5 out of 6 for undervaluation, a signal that cannot be ignored. But how well do those traditional valuation measures hold up, and is there a smarter lens to apply when sizing up an industry giant like this? Let us break down the valuation methods first and then circle back with a final perspective that could give you an even clearer answer. Johnson & Johnson delivered 12.5% returns over the last year. See how this stacks up to the rest of the Pharmaceuticals industry.
A Discounted Cash Flow (DCF) model seeks to estimate a company’s true value by projecting its future cash flows and then discounting them back to today’s dollars. This approach is particularly relevant for companies like Johnson & Johnson, which are known for consistent cash generation.
Currently, Johnson & Johnson is producing Free Cash Flow of more than $18.4 billion. Looking forward, analysts forecast steady cash growth for the company, with projections reaching $23 billion in 2027. After the standard five-year analysis period, additional estimates suggest annual Free Cash Flow could rise to approximately $28.3 billion by 2035. These projections combine Wall Street analyst insights and cautious extrapolation by Simply Wall St.
Applying these long-term cash flow assumptions and discounting them to present value yields an estimated intrinsic value of about $243.41 per share for Johnson & Johnson. With the actual stock price recently closing at $179.29, the DCF model indicates the stock may be 26.3% undervalued.
For a well-established and profitable company like Johnson & Johnson, the Price-to-Earnings (PE) ratio is a widely accepted measure for valuation. The PE ratio helps investors determine what the market is willing to pay today for a dollar of current earnings. This makes it useful for comparing companies with steady profit generation.
It is important to note that a “normal” or fair PE ratio depends on growth prospects and the risks faced by the company. Firms with higher expected earnings growth or more dependable profit streams often warrant a higher PE. In contrast, those with slower growth or higher risk tend to trade at lower multiples.
Currently, Johnson & Johnson trades at a PE ratio of 19.1x. This is close to the Pharmaceuticals industry average of 19.6x and below the peer average of 23.2x. Simply Wall St also applies a proprietary “Fair Ratio,” which reflects what investors ought to pay based on Johnson & Johnson’s earnings growth, market cap, profitability, and various risks. In this case, the Fair Ratio for Johnson & Johnson stands at 26.2x.
By looking beyond traditional comparisons and using the Fair Ratio, investors can gain a broader perspective. The Fair Ratio weighs not only industry trends but also the company’s own performance and risk profile. This comparison, with Johnson & Johnson’s PE of 19.1x against a Fair Ratio of 26.2x, suggests that the company may be undervalued at current levels.
Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives. A Narrative is simply your story about a company, the big picture behind the numbers, combining your personal view of its prospects with your own assumptions for future revenue, earnings, and margins. Narratives connect the company’s unique journey with your financial expectations, helping you calculate a fair value that reflects your perspective rather than just relying on generic market averages.
At Simply Wall St, millions of investors use Narratives every day on the Community page to frame buy or sell decisions. They compare their fair value against the current share price with just a few clicks. Narratives automatically update whenever key news or earnings are released, so your story stays fresh and your financial outlook remains grounded in real-time data.
For Johnson & Johnson, for example, one investor’s Narrative might forecast rapid earnings growth and continued margin expansion, leading to a high fair value of $190 per share. Another, more cautious, Narrative could see challenging patent expiries and tightening margins, resulting in a fair value closer to $155.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
