UPDATE: RBC Capital Markets Upgrades Johnson & Johnson

In a report published Tuesday, RBC Capital Markets analyst Brandon Henry upgraded

to Outperform from Sector Perform, raising its price target from $88.00 to $104.00. According to the report, JNJ's pharmaceutical franchise should continue to deliver above industry average revenue growth, owing to new product momentum and minimal generic risk. Operating leverage should continue as pharmaceutical launch spend slows, consumer consent decree spend slows and f/x becomes less of a headwind. “While the near term investment thesis in JNJ will continue to be about pharma growth, we believe that investors may be overlooking the operating margin expansion opportunity that exists over the longer term,” the report said. “JNJ delivered over 100bps of operating margin expansion in 2013, and is poised to deliver ~100bps in 2014 (ex the impact from the yen). Overall, we believe that JNJ is positioned to deliver 100-150bps of annual operating margin leverage over the next three years, as spend behind recent pharma launches abates and consumer remediation spend slows, and f/x becomes less of a drag. This should translate into high single digit EPS growth over the next three years. Our 2015 EPS forecast of $6.42 is $0.14 above Consensus.” The report further noted that the new price target coupled with a 3 percent dividend yield implies over 15 percent upside from current levels. While JNJ shares had a breakout year in 2013 (up ~31%), it is still seen as a meaningful upside potential from current levels, owing to continued outperformance in the pharma division, which in turn should allow the company to deliver upside to consensus EPS. JNJ closed Monday at $93.83 with shares trading up at 1.62 percent.