Is Johnson & Johnson Finally Getting The Right Medicine?

| About: Johnson & (JNJ)

The continuous bad news coming out of Johnson & Johnson (NYSE:JNJ) could cause an investor to have a headache.

The recent news out of Johnson & Johnson is that long-term CEO Bill Weldon will be retiring following a number of recalls that have hurt the company's earnings for the past couple of years. There has been a lot of pressure on Johnson & Johnson to get the manufacturing of its products back on track, because of all the negative publicity it has been facing.

Since 2009, Johnson & Johnson has recalled some 25 products, as noted by the Wall Street Journal. According to the article, the total costs of all the recalls will be around $900 million.

Here is a detailed list of the recalls in recent years from the article:

  1. J&J's Animas unit recalled earlier this month more than 384,000 insulin-pump cartridges in the U.S. and France, saying they have the potential to leak and give a too-low dose.

  2. As the Dow Jones Newswires reported recently, J&J's Ethicon unit issued a late-December alert in the U.K. that it was recalling about 585,000 surgical sutures. The sutures were mostly sold in Europe.

  3. In late February, J&J recalled more than 667,000 Sudafed packages at the wholesale level after a typo on the packaging ("do not not divide, crush, chew, or dissolve the tablet") was discovered. Customers don't need to return the products, which have the correct wording on the blister packs that hold the tablets. No adverse events have been reported as a result of the typo, J&J says.

  4. Earlier in February, J&J said it was pulling at least 395 injection pens preloaded with rheumatoid-arthritis drug Simponi because they may not deliver a full dose of the drug.

  5. Days before, the company's Ethicon unit recalled 700,000 vials of a liquid wound sealant and also a hernia-treatment product.

  6. Earlier that week, J&J said it was recalling 70,000 syringes preloaded with its Invega injectable anti-psychotic drug because cracks have been found in the syringes that could theoretically lead to infections or under-dosing in users.

  7. In January J&J said it would pull 43 million bottles of certain Tylenol, Benadryl, Sinutab and Sudafed products because they were made at the company's Ft. Washington, Pa., plant at a time when equipment may not have been properly cleaned. J&J also said it would pull almost 4 million units of Rolaids due to a labeling problem.

  8. In December, the company said it was recalling all lots of Rolaids Extra Strength Softchews, Rolaids Extra Strength Plus Gas Softchews and Rolaids Multi-Symptom Plus Anti-Gas Softchews following consumer reports of foreign-particle contamination.

  9. A few weeks earlier, J&J recalled a dozen different Mylanta liquid products and one AlternaGEL product because they were mislabeled to omit the presence of small amount of alcohol. (Consumers don't need to stop using the products or return them to stores.) And it separately widened a recall of daily-use contact lenses in Japan and elsewhere due to traces of an acid that can cause stinging. Contacts made in the U.S. aren't affected.

  10. In November, the company recalled three Tylenol Cold Multi-Symptom products, also pulled from retailers and wholesalers due to an alcohol labeling issue. Consumers can keep taking the meds, J&J says.

  11. Also in November the company recalled children's Benadryl and Motrin products. Again, J&J said they weren't dangerous and consumers didn't have to stop taking them.

  12. In October, there was a recall of 127,000 bottles of Tylenol 8-Hour caplets due to a musty odor.

  13. In August, J&J's DePuy Orthopedics unit pulled two hip implants off the market because of an unusually high rate of replacement surgeries.

  14. Also in August there was a recall - the one that was recently widened - of about 100,000 boxes of 1-Day Acuvue TruEye contact lenses.

  15. Some OTC medicines were pulled in July, including varieties of Benadryl, Tylenol and Motrin. This was a follow-up to a recall of musty-smelling products made at a plant in Puerto Rico.

  16. In June, the company widened the recall of drugs made at the Puerto Rican plant by five lots.

  17. The largest batch of children's medicines were pulled in the spring.

  18. In late 2009 there were recalls of Tylenol Arthritis Pain Caplets due to that musty odor issue.

  19. J&J officially recalled batches of Motrin in July 2009, but has come under fire for an earlier so-called "phantom recall" of the product.

  20. J&J's Ethicon unit withdrew 360,000 Blake Silicone Drains, J-VAC reservoirs and other products sold in the U.S. for draining surgical wounds.

This type of missteps by a well-respected company like Johnson & Johnson will in no doubt cause a headache for the new CEO and for Johnson & Johnson investors. We are now seeing the results of these missteps in the company's financial results.

Notes from Johnson & Johnson's 2011 results:

  1. Its domestic revenue declined by 3.4% YOY.

  2. Its net earnings per share for the year 2011 declined by 27.0%. As noted by Johnson & Johnson's press release, Fourth-quarter 2011 net earnings reflect after-tax charges of $2.9 billion, which include product liability expenses, the net impact of litigation settlements, costs associated with the DePuy ASR™ Hip recall program."

Currently, the stock trades at 18.7 P/E as compared to its industry peers that are 39.9 P/E. But Johnson & Johnson has been behind its peers in EPS growth rate for the past five years and has lagged its historical five year growth rate.

Should these results be a cause of concern? The short answer is no.

Johnson & Johnson has continued to do a phenomenal job producing strong results. Johnson & Johnson's operating margin for the past three quarters was 24.84%, and its ROE comes in at 16.38%, which is at or above its industry peers. Johnson & Johnson's balance sheet remains strong, and COH (cash on hand) sits at $30.9 billion. This would leave more than enough cash to make some acquisitions- and there are great opportunities out in Europe to take advantage of.

The yield for Johnson & Johnson is at 3.50%, which is above the ten year bond yield of 2.05% (but that is currently rising). Analysts predict that the EPS for 2012 should be $5.11, which will equate to a forward P/E of 11.96.

After Johnson & Johnson resolves its missteps, we can see JNJ shares make a huge pop and will add on to its 7.70% 52-week return, which is well above the S&P 500's 4.19% 52-week return.

This is a strong growth and income candidate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.