Johnson & Johnson (JNJ) is known as a medical conglomerate. Recently investors have learned more about the consumer division with the highly publicized product recalls in the United States. Investors should also be aware of the company's international consumer business which has delivered steady performance since the Pfizer acquisition in December 2006.
Johnson & Johnson had sales of $65 billion during 2011 which were mostly derived from pharmaceuticals, medical devices and diagnostic products. The company also has a $14.9 billion consumer division. Sales in this division are split 35% domestic and 65% international. That equates to a $9.7 billion international business. Sales for the past several years are depicted in the chart below.
Johnson & Johnson Revenue Analysis ($ millions)
|Total company (ex int'l consumer)||55,298||52,516||52,931||54,630||53,010||48,123||45,823|
During the past five years, the international consumer business has achieved compounded annual sales growth (CAGR) of 3.8%. In other words, the division has contributed 0.5% to the company's overall sales CAGR of 1.3% for the past five years. This is quite impressive for a division that represented only 15% of total company sales during 2011. While the press focuses on the U.S. consumer business, it should be noted that the international consumer business represents 65% of total consumer sales. This has increased from 56% in 2007 (first full year after Pfizer acquisition). The fortunes of the domestic and international consumer businesses have definitely diverged in the past several years. Sales for the international division have increased $1.6 billion or 20% during the past five years while the domestic division sales declined $1.3 billion or 20%.
The company publishes a quarterly schedule entitled "sales of key products/franchises" which is available on the investor relations website from 2007 onward. The table below depicts international consumer sales by category and my calculation of the 5-year CAGR.
Johnson & Johnson - International Consumer Sales
|Baby & kids||1,922||1,800||1,701||1,765||1,538||4.6%|
The skin care category includes brands such as Neutrogena, Johnson's, Aveeno, Rogaine and Lubriderm. The baby category includes Johnson's baby soap and various other baby soaps and creams. Oral care includes Listerine, Reach and Rembrandt. Women's Health includes Stayfree, O.B., Carefree and K-Y. Nutritionals include Splenda, Lactaid, Benecol and Viactiv. The OTC division has such iconic brands as Tylenol, Sudafed, Motrin, Pepcid, Nicorette, Benadryl, Rolaids and others. Finally, the company has brands such as Band-Aid, Neosporin, Tucks, Bengay, Visine and Acuvue. I am listing the brands because the consumer division includes many well-known items from the medicine aisle at the grocery store or local pharmacy.
While it appears that all categories registered healthy growth rates during the past five years, the results for skin care (3.7%), baby and kids (4.6%) and oral care (6.7%) were particularly strong. It should be noted that the sales figures include foreign currency, so they are driven by fluctuations in exchange rates. Nevertheless, there is a steady trend of growth during the 5-year period. Of course, the question of profitability is still left unanswered. The following chart depicts operating income by division for 2007 to 2011. Operating income represents the earnings before provision for income tax line item on the income statement. It is not possible to break-out the international consumer business, however, I think it is safe to say that a normal operating profit margin for the consumer business was the 2007-2009 period before the US consumer product recalls.
Johnson & Johnson - Operating Income Analysis
|Medical devices & diag||5,263||8,272||7,694||7,223||4,846|
|Less: unallocated exp||1,404||753||827||573||380|
|Medical devices & diag||25,779||24,601||23,574||23,126||21,736|
|Medical devices & diag||20.4%||33.6%||32.6%||31.2%||22.3%|
|Consumer % of total op profit||17%||14%||16%||16%||17%|
This chart illustrates that the consumer division doesn't deliver the highest profit margins for the company, however, they are the most consistent. The company does not break-out operating income for the international consumer business, however, the annual report commentary indicates that the 2.0% decline in operating margin for consumer (2011 vs. 2010) was related to unfavorable product mix and costs associated with the recall of certain OTC products. This was partially offset by a gain on the sale of the Monistat brand. The unfavorable product mix was probably related to the recalls. The company is selling fewer OTC products as their U.S. manufacturing facilities are overhauled. None of these factors indicate a significant change in the international business, therefore, it can be assumed that the international margins have been steady during the past few years while the domestic business has experienced margin deterioration.
I believe investors should consider the international consumer product business in their overall assessment of Johnson & Johnson. The division has delivered steady growth during the 5 years since the acquisition of Pfizer's consumer product business for $16.6 billion in December 2006. Several macro trends also favor this business including the aging of the developed world which will drive consumption of items such as skin care. The rise of emerging economies will drive consumption of consumer products with a particular focus on items such as baby care.
The overall risk profile of the consumer business is also different than the rest of Johnson & Johnson. The division spent 4.4% of sales on research and development in 2011 compared to 21.1% in the pharmaceutical unit and 6.8% in the medical device and diagnostic unit. This indicates that the consumer business doesn't rely on innovation to the same degree as the other businesses. The consumer business also has lower litigation expense than rest of the company. This is apparent from reviewing the operating margins in the pharmaceutical and medical device businesses which are skewed by significant legal items. The specific amounts are noted in the company's annual report.
Of course, no one wants to see Johnson & Johnson abandon its other lines of business with operating margins in the 20-30% range to pursue the 14-16% consumer product business. However, the international consumer business is a good counterbalance to the pharmaceutical and medical device units. The 5-year sales growth rate (CAGR) of 3.8% significantly exceeds the rest of the company at 0.8%. I believe the performance of this division will accelerate once the problems in the U.S. consumer business are fully addressed.
Disclosure: I am long JNJ.