J&J stays healthy as others get sick

11/3/2008


  Recent Price
$64
  Dividend
$1.84
  Yield
2.9%
  P/E Ratio
14
  Shares (millions)
2,831
  Long-Term Debt as % of Capital
16%
  52-Week Price Range
$72.76 - $52.06

Venerable health-care giant Johnson & Johnson ($64; NYSE: JNJ) adopted the red cross symbol to brand its first-aid kits in 1887. Today that familiar icon sends a similar message to different group of injured — investors seeking treatment for hemorrhaging portfolios.

J&J’s diversified business mix should continue to generate sales and profit growth through an economic downturn, and the steadily growing dividend (2.9% yield) is well-covered by earnings. With a strong balance sheet, ready access to cheap credit, and an investment portfolio with no exposure to subprime mortgages or troubled banks, J&J should weather the storm better than most.

Despite its defensive pedigree and solid September-quarter results, J&J shares are down 12% from an all-time high set in mid-September. Trading at less than 14 times projected year-ahead earnings, J&J is a Focus List Buy and a Long-Term Buy.

Business breakdown
J&J’s business mix extends from drugs (39% of sales in the nine months ended September) to medical devices (36%) to consumer products (25%). Revenue rose nearly 8% in the nine-month period, but only 3% excluding currency gains. In October, J&J purchased Internet company HealthMedia for an undisclosed amount, taking the first step in a long-term plan to expand into the health-services business.

During the nine-month period, drug sales fell 1.5% excluding currency gains, mostly because of increased competition in the wake of patent expirations. Like most drug companies, J&J faces cycles of expiring drug patents, during which lower-priced generics flood the market. J&J appears to be nearing the end of a cycle that has slowed growth in recent years.

Patent protection for the antipsychotic Risperdal ended in June. The branded drug still accounts for 22% of prescriptions for the active ingredient risperidone, while a generic version authorized by J&J controls about 35%.

Migraine and epilepsy treatment Topamax, J&J’s second-largest drug by revenue, delivered 14% sales growth in the nine months ended September. The drug will probably see generic competition in March 2009, while the patent on antibiotic Levaquin expires in 2010. Consensus estimates project per-share-profit growth of 3% in 2009 and 9% in 2010, numbers that discount substantial losses in market share but may understate the effects of several new J&J drugs expected to hit the market over the next year.

J&J hopes new products will revive pharmaceutical sales. Three potential blockbusters (drugs with peak annual sales of more than $1 billion) are under review by the Food and Drug Administration — a blood thinner and treatments for psoriasis and rheumatoid arthritis. J&J expects to submit seven to 10 new drugs to the FDA over the next year.

Conclusion
While acknowledging that the strengthening U.S. dollar could limit sales growth, J&J raised its 2008 profit guidance in October. Given the company’s defensive business mix and potential to outperform Wall Street’s modest expectations, J&J represents an appealing holding in today’s volatile market. An annual report for Johnson & Johnson is available at One Johnson & Johnson Plaza, New Brunswick, NJ 08933; (732) 524-0400; www.jnj.com.


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