JOHNSON & JOHNSON (JNJ) stock intrinsic value fair value estimate & owner earnings analysis

Johnson & Johnson is now a two-part health-care company. Innovative Medicine (prescription drugs such as Darzalex, Tremfya, Stelara, Carvykti, Erleada, Spravato and Caplyta) produced about 64% of 2025 sales of $94.2 billion, and MedTech (surgical, orthopaedic, cardiovascular and vision devices, including Abiomed heart pumps and Shockwave) produced about 36%. The Consumer Health business left as Kenvue in August 2023, so only 2024 and 2025 describe the company as it is today; earlier years include consumer products and are history only. The company also intends to separate its Orthopaedics business (DePuy Synthes). Shareholders would receive the new company's shares, so we treat that as neutral to per-share value. Earnings power. We measure owner earnings as operating cash flow, minus the swing in receivables, inventories and payables, minus stock-based pay (a real cost to owners), minus the capital spending needed to keep the business as it is. That gives $7.72 per share for 2024 and $8.00 for 2025 (2023 was $6.61, a transition year that still included part of the consumer business). We make two adjustments for valuation. First, 2024 and 2025 cash flow was reduced by about $2.0 billion and $2.5 billion of installments on the one-time 2017 tax on accumulated foreign earnings. The final installment was paid in 2025, so we add those payments back. Second, we value the business before its lenders by adding back interest paid, net of interest earned on cash, and then deducting the debt separately. On that basis the business produced about $8.78 per share in 2024 and $9.36 in 2025. Our starting level is the $9.07 midpoint. The first half of 2026 supports it: operating cash flow was $11.1 billion against $8.1 billion a year earlier, and sales rose 8%. Accounting judgements. Operating cash flow already adds back the amortization of acquired drug and device rights ($4.6 billion in 2025) and write-offs of acquired research. Those rights wear out as patents expire, so we charge that decay in the growth path (the dip after the 2029 Darzalex patent expiry) and not in the starting level. Each year's cash flow also includes several billion dollars of other tax, litigation and similar payments. We leave those in as a recurring cost. That includes a $6.2 billion increase in other assets in 2025 that the filing does not break down, which may understate 2025 slightly. The talc reserve swings were non-cash: a $7.0 billion charge in 2023, $5.1 billion in 2024 and a $7.0 billion reversal in 2025. They do not affect these figures, and we charge the talc cost separately below. Base case, $179.50 per share. Year one rises 6% from the starting level, below the 6.7% actual growth of 2025. Two dated items support it: a full year of Caplyta from the Intra-Cellular acquisition (closed April 2, 2025) and the end of the foreign-earnings tax installments. They are offset by continued biosimilar erosion of Stelara, Medicare negotiated prices on Stelara and Xarelto from January 2026, and the January 2026 pricing agreement with the US government. Cash flow then grows 4% a year in 2028-2029 from products already on the market (Tremfya, Darzalex Faspro, Carvykti, Tecvayli, Talvey, Rybrevant, Spravato, Caplyta, and the Abiomed and Shockwave lines). Darzalex sells about $16 billion a year and its US patents expire in 2029, so cash flow falls 3% in each of 2030 and 2031 and is flat in 2032. It then grows 3% a year to year ten as the research engine (about $14.7 billion of R&D in 2025) replaces lost products, as it did after Remicade, Procrit, Risperdal, Zytiga and now Stelara. Years 11-20 grow 2%, after which cash flow is held flat. The one driver that carries the story past year ten is that same multi-decade record of replacing expiring drugs, backed by a MedTech installed base and hospital relationships. No growth is credited from unapproved pipeline drugs or new markets. Talc is assumed to cost about $10.4 billion before tax ($8.2 billion after tax). That is the current $3.4 billion reserve plus the roughly $7 billion the company itself had set aside for its 2024 bankruptcy settlement plan, which most claimants voted for and the court dismissed in March 2025. The business is worth about $194 per share (about $475 billion). It owes about $11.57 per share in net debt and $3.36 per share of after-tax talc cost, which leaves $179.50. Bear case, $110.14 per share. Year one rises only 3%. Year two includes a one-year collapse in procedure volumes like 2020, when the company's device sales fell 11.6%, so cash flow drops 5%. Then, as in the 2011-2013 industry patent cliff when large drugmakers' earnings fell 20-40%, the 2029 loss of US Darzalex protection arrives with no subcutaneous shield and with wider government price setting under Medicare negotiation and most-favoured-nation terms. Cash flow falls 12% in each of 2030 and 2031, to about 23% below today. It is flat for two years, grows 2% a year to year ten, and stays flat at about $7.44 per share forever. Talc and the certified securities class action cost $18.4 billion before tax ($14.5 billion after tax), because trials in the tort system go worse than the abandoned plan. The business is worth about $128 per share (about $312 billion). It owes $11.57 per share in net debt and $5.95 per share of talc cost, which leaves $110.14. Even here business cash flow covers interest about eight times over. Bull case, $230.50 per share. Year one rises 6.6%. Growth is 6% a year in 2028-2029, carried by the oncology portfolio (sales growing about 20% in early 2026) and Tremfya (up 74% in the first quarter of 2026). Darzalex Faspro holds most of its US sales after 2029, so cash flow still grows 1% a year in 2030-2032. Growth is 5% to year ten, 3% in years 11-20, then flat. Talc is resolved within the existing $3.4 billion reserve. The business is worth about $243 per share (about $594 billion). It owes $11.57 plus $1.10 per share, which leaves $230.50. Debt. At June 28, 2026 the company had $49.0 billion of borrowings: $11.7 billion of short-term loans and commercial paper and $37.3 billion of long-term bonds maturing out to 2060. Against that it held $20.8 billion of cash and marketable securities, of which we treat $5 billion as needed to run the business. Much of the bond debt is long-dated and fixed-rate, with cash interest of about 4.4% of average borrowings in 2025, well below what new long-term money costs, so we reduce the debt figure by about $5 billion. Net debt is about $28.3 billion, or $11.57 per share. The company is rated at the top of the credit scale and no maturity or covenant materially affects the outcome. Margin-of-safety price. We are fairly sure of the earnings level. Operating cash flow has run $21-25 billion in each of the last nine years, through the Kenvue separation, a pandemic and several large acquisitions, and the first half of 2026 was stronger again. The worst plausible combination is an expensive talc outcome in jury trials, a fast loss of US Darzalex sales in 2029-2031 and a broad cut in US drug prices. The structure would survive all three: net debt is about 1.3 years of pre-interest cash generation, sales are spread across two segments and many products, and the company has raised its dividend for more than 60 consecutive years. If we are wrong about the three things we are most likely to be wrong about (how well Darzalex is replaced, what talc finally costs, and US pricing policy), the shares are worth roughly $110. The business pays about $5.20-5.30 a share in dividends each year over the holding period, and the price assumes a holding period of about three years. At $120 the price is about 13 times the pre-interest cash the business generates per share. The dividend alone equals more than 4% a year. If the business's value is recognized within about three years, the implied return with dividends is close to 20% a year, and if the bear case occurs the implied decline is about 8% before dividends. That combination of protected downside and a realistic 20% path is why the margin-of-safety price is $120 and not higher. Changes since our previous review. Earlier figures were prepared on a different basis and are not comparable. On the business itself: cash generation in the first half of 2026 was markedly stronger, the foreign-earnings tax installments have ended, the talc reserve now stands at $3.4 billion with the company litigating cases individually, the company signed a pricing agreement with the US government in January 2026, and US patents on Darzalex, its largest drug, expire in 2029.