5 Reasons We Like Johnson & Johnson

Mar.28.13 | About: Johnson & (JNJ)

Johnson & Johnson (NYSE:JNJ) is one of the world's largest and most diversified healthcare companies with operating segments in the pharmaceutical, medical device, and consumer products businesses. Most of Johnson & Johnson's revenues come from overseas with international revenues comprising about 56% of total revenues.

Pharmaceuticals represent about 38% of total revenues with the principal pharmaceutical products generating about $13.0 billion in revenues in 2012. These products include Concerta ($1.1 billion in sales), Prezistia ($1.4 billion in sales), Risperdal Consta ($1.4 billion in sales), Velcade ($1.5 billion in sales), Procrit/Eprex ($1.5 billion in sales), and Remicade ($6.1 billion in sales). Also, Johnson & Johnson is focused on the future with a robust drug development pipeline with 17 drugs in late stage development (most in FDA review or in phase III trials).

Medical devices/Diagnostics account for about 41% of total revenues. Some brands in this segment are Cordis circulatory disease management products, Depuy/Synthes orthopedic products, Ethicon wound care products, Lifescan blood glucose monitors, and Ortho clinical diagnostic products.

Lastly, the global consumer products segment generates about 21% of total revenues. Johnson & Johnson's consumer products segment consists of some of the best known consumer brands in the world. Some of these brands include Tylenol, Band-Aid, Johnson's Baby products, Imodium A-D, Neutrogena hair/skin products, Zantac, Neosporin, Listerine, Lubriderm, Visine, Benadryl, and Sudafed.

Last year (June 2012) Johnson & Johnson made an acquisition to bolster its medical device products segment. The acquisition was of the Swiss orthopedic device company Synthes in a cash and stock deal worth $19.7 billion. One interesting aspect of the deal is that it was mostly funded with overseas cash that had not yet been repatriated to the U.S. Using cash located overseas avoids income tax on repatriated funds thus effectively lowering the acquisition cost of the deal to Johnson & Johnson. Johnson & Johnson expects that the Synthes acquisition will add about $0.10 to $0.15 to 2013 earnings.

We expect the drugs Zytiga and Xarelto to drive earnings growth in the pharmaceutical segment and the Synthes acquisition to drive earnings growth in the medical device segment. Johnson & Johnson has had issues in its consumer products segment specifically in its OTC drug business. In fact, Johnson & Johnson's McNeil OTC business is operating under a FDA consent decree due to quality control issues/product recalls. We expect most of the recalled products to be back on the market in 2013 thereby helping revenues in this segment to get back on track. Analyst's consensus earnings estimates for Johnson & Johnson are $5.41 for 2013 and $5.77 for 2014. Compared to 2012 earnings of $3.86, Johnson & Johnson's future looks pretty bright for the next few years.

We believe that Johnson & Johnson is a good buy for following reasons:

  1. Johnson & Johnson is selling at an attractive forward earnings multiple of 14.1 times 2013 projected earnings.
  2. Johnson & Johnson has a fortress balance sheet with $21.1 billion in cash and relatively little debt (7% of capitalization).
  3. Johnson & Johnson has a 3.1% dividend yield and a history of consistent dividend increases with a 7% increase in the dividend last year (May 2012).
  4. S&P has a Buy rating on the stock (4 out of 5 stars) and a 12 month price target of $88.00 per share.
  5. Johnson & Johnson has a better credit rating than the U.S. government with an S&P credit rating of AAA.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JNJ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Ulfberht Capital is not an investment advisor. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.