Johnson & Johnson (JNJ) is one of the stocks most watched by Zacks.com visitors lately. So, it might be a good idea to review some of the factors that might affect the near-term performance of the stock.

Over the past month, shares of this world's biggest maker of health care products have returned +3.5%, compared to the Zacks S&P 500 composite's +1.9% change. During this period, the Zacks Large Cap Pharmaceuticals industry, which Johnson & Johnson falls in, has gained 4.6%. The key question now is: What could be the stock's future direction?

Although media reports or rumors about a significant change in a company's business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.

Here at Zacks, we prioritize appraising the change in the projection of a company's future earnings over anything else. That's because we believe the present value of its future stream of earnings is what determines the fair value for its stock.

Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.

Earnings Estimates & Revisions

For the current quarter, Johnson & Johnson is expected to post earnings of $2.26 per share, indicating a change of -15% from the year-ago quarter. The Zacks Consensus Estimate has changed -2.9% over the last 30 days.

For the current fiscal year, the consensus earnings estimate of $10.07 points to a change of +1.5% from the prior year. Over the last 30 days, this estimate has remained unchanged.

For the next fiscal year, the consensus earnings estimate of $10.63 indicates a change of +5.5% from what Johnson & Johnson is expected to report a year ago. Over the past month, the estimate has changed -0.2%.

With an impressive externally audited track record, our proprietary stock rating tool -- the Zacks Rank -- is a more conclusive indicator of a stock's near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #4 (Sell) for Johnson & Johnson.

Revenue Growth Potential

Even though a company's earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It's almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company's potential revenue growth is crucial.

In the case of Johnson & Johnson, the consensus sales estimate of $22.17 billion for the current quarter points to a year-over-year change of +3.9%. The $88.51 billion and $90.91 billion estimates for the current and next fiscal years indicate changes of -4.9% and +2.7%, respectively.

Johnson & Johnson reported revenues of $22.45 billion in the last reported quarter, representing a year-over-year change of -12.1%. EPS of $2.82 for the same period compares with $2.80 a year ago.

Compared to the Zacks Consensus Estimate of $22.35 billion, the reported revenues represent a surprise of +0.43%. The EPS surprise was +4.06%.

The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates three times over this period.

Valuation & Style Scores

Without considering a stock's valuation, no investment decision can be efficient. In predicting a stock's future price performance, it's crucial to determine whether its current price correctly reflects the intrinsic value of the underlying business and the company's growth prospects.

While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.

As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Johnson & Johnson is graded C on this front, indicating that it is trading at par with its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Recent Earnings Report & Outlook

A month has gone by since the last earnings report for Johnson & Johnson (JNJ). Shares have added about 2.4% in that time frame, outperforming the S&P 500.

J&J’s second-quarter 2024 earnings came in at $2.82 per share, which beat the Zacks Consensus Estimate of $2.71. Earnings rose 10.2% from the year-ago period.Adjusted earnings exclude intangible amortization and some other special items. Including these items, J&J reported second-quarter earnings of $1.93 per share, down 5.9% year over year.Sales came in at $22.45 billion, which beat the Zacks Consensus Estimate of $22.35 billion. Sales rose 4.3% from the year-ago quarter, reflecting an operational increase of 6.6% and a negative currency impact of 2.3%. Organically, excluding the impact of acquisitions/divestitures and currency, sales rose 6.5% on an operational basis. Excluding sales of COVID-19 vaccine, organic sales rose 7.1%.Second-quarter sales in the domestic market rose 7.8% to $12.57 billion. Excluding the impact of all acquisitions and divestitures on an adjusted operational basis, domestic sales rose 7.6% in the quarter.International sales rose 0.2% on a reported basis to $9.88 billion, reflecting an operational decrease of 5.1% and a negative currency impact of 4.9%. Excluding the impact of all acquisitions and divestitures on an adjusted operational basis, international sales rose 5.3% in the quarter.

While J&J maintained its total revenue expectation, it lowered its previously issued earnings growth expectation for 2024. The company’s expectation of a better operational performance was offset by costs associated with recent acquisitions.

Total revenues are expected in the range of $88.0 billion-$88.4 billion for 2024. The sales range indicates growth in the range of 4.7%-5.2%. Operational sales growth is expected in the range of 6.1%-6.6%, compared with 5.5 expected previously.

The adjusted operational sales (excluding currency impact, acquisitions/divestitures) growth guidance was maintained in the range of 5.5.

The revenue figures exclude revenues from COVID-19 vaccine sales.

However, the earnings guidance was lowered to account for the financing costs associated with recent acquisitions of medical device company Shockwave Medical (closed in May) and private biotech Proteologix (closed in June).

The adjusted earnings per share guidance was lowered from a range of $10.57-$10.72 per share to $9.97-$10.07 per share. The earnings range implies growth in the range of 0.5%-1.5% (6.6%-8.1% expected previously).

On an operational, constant-currency basis, adjusted earnings per share are expected to increase in the range of 0.8%-1.8% (previously 6.9%-8.4%).

Adjusted operating margin is expected to be lower in the second half compared to the first half of the year. Adjusted pretax operating margin is expected to decline 120 bps compared to the prior expectation of improving by approximately 50 basis points from 2023.

Other income is expected to be in the range of $1.5 billion to $1.7 billion versus $1.2 billion to $1.4 billion previously. Net interest income is expected in the range of $300 million to $400 million compared with $550 million to $650 million expected previously. The guidance was lowered to account for the interest expenses associated with the recent acquisitions.

The adjusted tax rate is expected in the range of 17.5%-18.5% compared with 16.0%-17.5% previously.

The Bottom Line

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Johnson & Johnson. However, its Zacks Rank #4 does suggest that it may underperform the broader market in the near term.

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -13.8% due to these changes. Currently, Johnson & Johnson has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in. Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Johnson & Johnson has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.