J&J Weathers The Storm

7/27/2009


  Recent Price
$59
  Dividend
$1.96
  Yield

3.3%

  P/E Ratio
13
  Shares (millions)
2,782
  Long-Term Debt as % of Capital
16%
  52-Week Price Range
$72.76 - $46.25

Johnson & Johnson’s ($59; JNJ) holdings are vast, but its strategy is simple: Support a deep pipeline of new drugs and medical devices with an aggressive acquisition strategy and cost controls. Since November, J&J has completed three takeovers for more than $2.2 billion and agreed to invest another $1.5 billion in Elan’s ($8; ELN) Alzheimer’s portfolio.

This year the U.S. pharmaceutical market is expected to contract for the first time in 50 years as fewer people visit doctors or start new therapies for chronic conditions. Beyond 2009, an economic recovery should reinvigorate J&J, though it is too early to determine whether health-care reform will help or harm the company.

Despite the recession, J&J has kept its financial footing, remaining one of the few companies with the top credit rating of AAA. Consensus profit estimates have climbed in the past month, and the stock looks cheap. J&J, yielding 3.3%, is a Focus List Buy and a Long-Term Buy.

Business mix

J&J’s pharmaceutical segment (38% of revenue) has seen sales fall nearly 9% over the past year. In addition to recessionary forces, generic competition has weighed on the segment. The patent on epilepsy drug Topamax expired in March, and J&J lost exclusivity for its Risperdal antipsychotic in June 2008.

Several experimental drugs have the potential to rejuvenate J&J’s portfolio. Analysts expect up to seven new drugs from the pipeline to begin contributing to revenue this year. Stelara for severe plaque psoriasis and Simponi for rheumatoid arthritis have already gained regulatory approval outside of the U.S. and are under review by the U.S. FDA. As part of its investment in Elan, J&J gained an option that could allow it to acquire Biogen Idec’s ($48; BIIB) 50% stake in Tysabri, a blockbuster drug for multiple sclerosis, if Biogen is acquired.

J&J’s other two segments have treaded water in the past 12 months, delivering roughly flat sales. Medical devices (37% of revenue) include glucose-monitoring systems, orthopedic implants, stents, and surgical equipment.

The consumer division (25%) features such familiar brands such as Band-Aid, Tylenol, Listerine, Sudafed, and Benadryl. Citing potential liver damage, an FDA advisory panel has suggested lowering the recommended dosage of certain painkillers, including Tylenol. The FDA plans to make a decision in three to six months.

Conclusion

Consensus estimates project roughly flat per-share profits in the second half of 2009, as share repurchases and streamlining should help offset weaker sales. In the June quarter, J&J earned $1.15 per share, down 3% but $0.04 ahead of the consensus. Management reaffirmed a per-share-profit target of $4.45 to $4.55 for this year, versus $4.57 in 2008. For 2010, Wall Street anticipates per-share profits will rise to $4.89.

J&J’s stock price already reflects Wall Street’s modest expectations. Shares trade at 13 times trailing earnings, a 23% discount to the five-year average P/E ratio. The stock’s price also looks appealing relative to trailing sales (21% below the five-year average), cash flow (26%), and book value (18%). An annual report for Johnson & Johnson is available at One Johnson & Johnson Plaza, New Brunswick, NJ 08933; (732) 524-0400; www.jnj.com.

 

JOHNSON & JOHNSON
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '09 $1.15 vs. $1.18 - 7% $57.23 -

$50.12

12 - 11
Mar '09 1.26 vs. 1.26 - 7% 61.00 - 46.25 13 - 10
Dec '08 0.97 vs. 0.88 - 5% 69.07 - 52.06 15 - 12
Sep '08 1.17 vs.

1.06

+ 7% 72.76 - 63.74 17 - 15
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $63.75 $4.57 $1.80 $72.76
-
$52.06 16 - 11
2007 $61.04 $4.15 $1.62 68.75
-
59.72 17 - 14
2006 $53.19 $3.76 $1.46 69.41
-
56.65 18 - 15
2005 $50.43 $3.50 $1.28 69.99
-
59.76 20 - 17
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
81 57 69 74 91 84 45

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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