Johnson & Johnson Has Enough Catalysts To Beat The Market

Jul.31.14 | About: Johnson & (JNJ)

Summary

Johnson & Johnson's new products have gained solid adoption around the globe, and more are in the pipeline.

Johnson & Johnson also is improving its existing products to maintain customer loyalty.

Johnson & Johnson's new drugs will allow it to address a multi-trillion dollar opportunity.

Johnson & Johnson has an impressive valuation, and its earnings are expected to grow at a better rate over the next five years than the last five.

Johnson & Johnson (NYSE:JNJ) is enjoying a good time in 2014, appreciating 10% and beating the broader market so far. The healthcare major delivered strong second-quarter results, driven by the strong performances of over-the-counter products, skin care and baby care products. Additionally, international sales of its oral care and feminine protection products were strong. Besides, its hepatitis C drug, Olysio, also drove the company's sales.

The Hepatitis C opportunity

The hepatitis C market is expected to grow at a fast pace going forward. In fact, according to Datamonitor Healthcare, the market for hepatitis C drugs will grow a whopping 230% by 2022 from 2013. This will result in a market size of $15.5 billion.

According to Sabada Dube, lead epidemiologist at Datamonitor Healthcare:

"Despite recent clinical breakthroughs, Hepatitis C remains a huge public health problem across the world with 7 million people currently living with the virus across the US, Japan and 5 major EU markets. The number of people living with hepatitis C in these markets is forecast to increase except in Japan where marginal declines in infected people is expected."

With Olysio, Johnson & Johnson has made a smart move to tap this vast market. In addition, Olysio costs 21% less than Gilead Sciences' (NASDAQ:GILD) hepatitis C drug, Sovaldi, for 12 weeks of treatment. As such, there's a good chance that Johnson & Johnson will be able to make a dent in this fast-growing market going forward.

A big market to tap

Johnson & Johnson is working aggressively on four strategic growth drivers. It is focused on creating value through innovation, global reach, local focus and excellence in execution.

According to Johnson & Johnson, the global healthcare market is enormous, with an overall spending of over $8 trillion. The company is focused on launching various new products to benefit from this tremendous growth opportunity, as explained below.

New launches will act as catalysts

Johnson & Johnson experienced robust growth of 5% in its Medical Device and Diagnostic segment, which is its largest business. To sustain the strong growth in this division, Johnson & Johnson recently launched its CORAIL revision Hip System in both the U.S. and Europe. Its Trauma business also is progressing nicely, attaining solid 7% growth in the reported quarter. Looking ahead, the company expects this segment to continue growing, driven by the positive impact of a tender it won in the Middle East as a result of its wide-ranging offerings.

Going forward, the recent FDA approval of its supplemental PMA with the SEDASYS System should enhance growth. The company plans to introduce this technology in the U.S. market in the second half of 2014.

Besides, Johnson & Johnson also launched HARMONIC ACE+7 Shears with advanced hemostasis, the first purely ultrasonic device with a 7-millimeter sealing indication. It believes that this technology will help Johnson & Johnson attain a competitive edge over peers. Johnson & Johnson anticipates strong contributions from its recently-launched products, as well as from its pipeline that includes more than 30 major filings planned by the end of 2016.

Products in demand

The good thing is that the company's products are seeing broad-based demand, and it is now looking to push the envelope further. For example, Johnson & Johnson has strategically identified 11 key need states.

The company is on track to tap them with its expertise. It is focusing on 12 well-known brands, including Listerine, Aveeno, Tylenol and Johnson's Baby to ensure that they exceed consumer expectations around the world.

For example, Johnson & Johnson has observed strong growth in the oral care business outside the U.S., and consistent improvement in the product portfolio will enable it to sustain the growth going forward.

Apart from this, the company is strategically engaged in developing partnerships with many big retailers across the world that should boost its sales going forward. Its strategic associations are intended to create a supreme experience for consumers in over-the-counter categories such as cold and flu by sharing insights and developing habits to reduce complexity for consumers. Also, Johnson & Johnson is making good progress in restoring brands to the shelves to deliver above-market growth.

Impressive valuation

Johnson & Johnson trades at a trailing P/E of 19.55 and a forward P/E of 16.1. This indicates that further earnings growth is expected in the future. The company also has a solid cash position of $29.4 billion, which easily eclipses its debt of $17.3 billion. Hence, Johnson & Johnson can continue investing in new product development, along with marketing, to fuel its growth.

Moreover, over the next five years, Johnson & Johnson's earnings are expected to grow at a CAGR of 7.1%, which is better than the growth of 5.5% reported in the last five years. Additionally, Johnson & Johnson carries a strong dividend yield of 2.70%, which is another reason why investors should consider this stock for their portfolio.

Thus, all in all, Johnson & Johnson still looks like a solid investment, and investors should continue holding the stock, even though it is trading at 52-week highs.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.