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Summary

  • As long as Johnson & Johnson continues to rake in the profits, management should be left alone to execute its vision.
  • I remain encouraged by Johnson & Johnson’s improvements to balance out all of its businesses and produce decent organic growth.
  • With shares trading at around $96, factoring 7% to 8% long-term free cash flow growth, I arrive at a price of $105.

With shares of Johnson & Johnson (NYSE:JNJ) soaring 50% over the past two years, I'm still puzzled by the constant pleas for the company to break itself into smaller entities. The drug giant is perceived too big.

But with meaningful improvements being made each quarter in areas like orthopedics and medical devices, the company's management has had reasons to ignore these demands and not try to fix something that isn't broken. Although the company's drug business has done all of the heavy lifting over the past several quarters, including a 12% jump in the January quarter, JNJ surprised investors with a 22% jump in the company's immunology platform.

The strong jump in immunology more than offset the 1% decline in the devices business. In that regard, management hasn't received the credit it deserves for such a quick turnaround in a segment that continues to be treated as an afterthought. This means that JNJ is holding its own in this market against rivals like Stryker (NYSE:SYK) and Covidien (NYSE:COV).

What's more, even in areas that were known to be problematic such as the consumer segments, Johnson & Johnson still manages to produce better than 5% adjusted revenue growth. Not to mention the 36% year-over-year jump in oncology.

All told, despite what the bears want to believe, Johnson & Johnson is working its way to become a more diversified medtech player. On Tuesday, the company will look to extend its streak of strong quarterly performances and silence these bears once and for all.

The Street will be looking for first-quarter earnings of $1.48 per share. For the full fiscal year, analysts are expecting earnings of $5.83 per share. Revenue for the quarter is expected to be $18 billion, which would represent 3% year over year growth and topping last year's mark of $17.51 billion. For the year, revenue is projected to roll in at $74.20 billion.

Analysts seem a bit more optimistic about the results. This is because Johnson & Johnson has posted an average revenue increase of 6% over the past four quarters. The biggest increase came in the second quarter, when revenue rose 9% year over year. Likewise, profits have grown for three consecutive quarters, and there are no meaningful signs of slowing down.

Earnings have grown amid stiffer competition from (among others) Pfizer (NYSE:PFE) and Merck (NYSE:MRK). And it seems somewhat misguided to continue pressuring management to break up the company. There is no evidence to suggest that a breakup would immediately create value.

As a note, although the drug business remains the company's main revenue driver, it is nonetheless a well-positioned business. What's more, the company still has several highly regarded businesses and leads the markets in areas including orthopedics, medical devices and nutrition.

These are facts investors should begin to appreciate. And as long as Johnson & Johnson continues to rake in the profits, management should be left alone to execute its vision. The other thing is; even if the other businesses were to take a step or two backwards, the company's strong drug business should keep growth going for the next several years.

As it stands, I remain encouraged by Johnson & Johnson's improvements to balance out all of its businesses and produce decent organic growth. With shares trading at around $96, factoring 7% to 8% long-term free cash flow growth, I arrive at a price of $105. This is $3 per share higher than the current median target of $102 by the 17 analysts that cover the company. Of which, 60% have issued a buy rating.

Source: Why Johnson & Johnson Is Heading To $105