The Top "Undervalued" Pharmaceutical Stock to Buy Today

Today we're bringing you a pharmaceutical stock to buy that is highly undervalued by the market and analysts.

This stock actually operates in three different industries, making it hard for analysts to properly value the company. According to Money Morning Director of Technology & Venture Capital Research Michael Robinson, that's why this pharmaceutical stock is undervalued.

The three industries the company operates in are:

  • Pharmaceuticals
  • Consumer products
  • Medical devices

But analysts typically only look at the pharmaceutical component of the company when evaluating its worth.

In fact, two different analysts revised their recommendations for the stock this year, but both evaluations only discuss the pharmaceutical side of the business to justify the revised ratings. Wells Fargo & Co. downgraded the stock on Jan. 26, and JPMorgan Chase & Co. upgraded the stock's rating on May 15.

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Pharmaceutical stock to buyYet the company has the ninth most powerful consumer brand in the world, according to Brand Finance.

While analysts typically only evaluate the company's pharmaceutical sector, all three divisions of the company significantly contribute to the company's total sales.

On Tuesday (July 18), the company released its Q2 earnings report. The report showed that pharmaceuticals accounted for the biggest portion of the company's sales, at $8.6 billion. Medical devices brought in $6.7 billion in sales for the quarter, and consumer products had $3.5 billion in sales.

If you are only looking at the pharmaceutical component of the company, you are only seeing 45% of the sales. Even then, "the stock is trading at a deep discount right now and is just too tempting to pass up," Robinson said...

This Undervalued Pharmaceutical Stock to Buy Is Too Good to Pass Up

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The top pharmaceutical stock we're recommending today is Johnson & Johnson (NYSE: JNJ).

Using industry price/earnings (P/E) ratios, JNJ is highly undervalued.

The P/E ratio is a popular metric for valuing a company. It is the price (in our case per share) divided by earnings (per share). The ratio gives you a multiple of earnings you are paying to own the company and allows for comparison of different companies and industries.

The trailing P/E ratio for the pharmaceutical industry is 43.69, according to the Stern College at New York University. According to Fidelity, last year's P/E ratio for the consumer goods industry was 23.64, and the P/E ratio for the medical devices industry was 45.58.

Johnson & Johnson's trailing P/E ratio is just 22.79, lower than any of the industries it operates in.

To get a full picture, the weighted industry average P/E for those three industries is 40.6.

The weighted average is taken by multiplying each P/E ratio by the percent of sales for JNJ, then adding all three numbers together. This weighted average P/E ratio is a way to evaluate all three industries the company operates in at the same time. In order for JNJ to reach a P/E ratio of 40.6, the stock would need to gain 56%.

And if being seriously undervalued isn't enough of a reason to buy JNJ, here are two more from Robinson: the dividend and the company's pipeline.

Johnson & Johnson has increased its dividend 55 years in a row. Currently, its dividend yield is 2.49% ($0.84 per share).

"And best of all, Johnson & Johnson and some of its partners announced plans to file for regulatory approval for a whopping 10 potential blockbuster drugs (good for $1 billion in sales a year) over the next four years," according to Robinson.

Robinson's suggestion is to buy the stock now and hold onto it because the discount is too good to pass up.

The Bottom Line: Analysts are only evaluating one aspect of Johnson & Johnson's business, but the company has three major business segments. This allows you to buy the stock at a discount and is why JNJ is one of the top stocks to buy now.

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