Fundamentally positive trends are taking place in expectations for Johnson and Johnson, which should help to drive the stock higher in the future. Shares of the stock could rise by nearly 13% from current levels based on a multiple of 18 times 2019 EPS estimates with the stock price approaching $150.

Rising Analyst Estimates

Shares of the stock have been trading sideways since mid-June, and that has given the stock a chance to consolidate and have its fundamentals catch up with the stock price. Since the beginning of the year, 2018 EPS estimates have risen by $0.19 to $7.73, and revenue estimates have increased by nearly $2 billion to $80 billion, fueled by the $30 billion acquisition of Actelion. The increasing views have helped to bring down the 2018 forward P/E from what was a historically high level around 18, back toward 17. That small difference in the P/E represents a difference of nearly 5% in the price of the stock, at current levels. (For more, see: J&J Buying Actelion for $30 Billion Cash.)

The increasing EPS estimates has carried through not just for 2018, but 2019 as well. Again, bringing down forward multiples, analysts are expecting the drugmaker to earn $8.18 in 2019, which gives the company a 2019 forward PE ratio of roughly 16 times.

Rising Revenue

However, there is even better news for the shares of Johnson and Johnson because the estimate upgrades are not coming just in EPS, but in top line revenue growth. Estimates for 2019 have risen by nearly $2.5 billion since the start of the year, again with some attribution due to the acquisition of Actelion. (For more, see also: Johnson & Johnson's Growth Prognosis Is Cloudy.)

Improving Margins

The signal is a positive because it is showing that the deal for Actelion is adding value to Johnson and Johnson and that the new revenue will likely flow to the bottom line. Analysts are looking for operating profit margin to expand by roughly 1.5% and 31.6% by the year 2019, from 2017 expectations. Again, a sign that revenue growth can outpace that of the expenses. Over the past several years, margins had been relatively static, but the hope for improving margins is yet another positive for EPS growth and the stock price.

After a solid run at the start of the year, Johnson and Johnson’s stock price has consolidated nicely, which should have given it the time to see its fundamentals catch up with the stock price. However, the pace of future estimates will need to continue to rise to hold a premium valuation, and that means the company will need to deliver in coming quarters to keep investors willing to pay up.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.