Johnson & Johnson (JNJ) could be considered "the Teflon® healthcare company", as no matter how many snafus and recalls the company endures, it maintains its image of a top-notch company with impeccable integrity.
In its latest misstep, the company is recalling its entire U.S. supply of infant Tylenol after problems encountered with a new dosing system.
In its most recent Q4 2011 earnings call, even though the company started delivering growth after two years, U.S. sales were down 3.4%. The company's positive performance was primarily due to international growth and due to success of new product launches, an amended agreement with Merck (MRK) regarding REMICADE and SIMPONI as well as the company's acquisition of Crucell.
The spat between Merck and Johnson & Johnson was a result of Merck purchasing Schering-Plough, with whom Johnson & Johnson had a co-marketing agreement.
With its acquisition of Crucell, Johnson & Johnson gains a strong position with respect to research and development, production and marketing of vaccines and antibodies.
J&J's stock price has been in an upward trajectory over the last year, with a significant dip in the July-August timeframe as shown below (click to enlarge images):
With J&J's earnings release out of the way, its limited upside potential and its Teflon® image, an investment to consider for the company is a bull-put credit spread. A bull-put credit spread may be entered by selling one put option and purchase a second put option further out-of-the-money.
Using PowerOptions tools, a bull-put credit spread for J&J was found with a potential return of 5% (62.9% annualized) using midpoint pricing as shown below:
The specific put option to sell is the 2012 Mar 62.50 at a midpoint price of $0.28 and the put option to purchase is the 2012 Mar 57.50 at a midpoint price of $0.04. A profit/loss graph for one contract of the position is shown below:
A management point for the position for consideration is around $63.75. If the price of the stock drops below $63.75, management of the position for an exit or roll should be considered.