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European regulators announced Thursday, April 19, approval for Johnson & Johnson's (NYSE:JNJ) $21 billion takeover of medical equipment maker Synthes after the former agreed to a concession requiring it divest its trauma business in Europe. There was some worry that Johnson & Johnson, which already has a strong foothold in that market, would limit competition by acquiring Sythes, which manufactures treatments for trauma, including bone implants and surgical tools. The deal has been roughly a year in the making and is valued at $21.3 billion, making it Johnson & Johnson's largest acquisition ever, and one of the biggest deals so far this year.

The news came just two days after Johnson & Johnson reported mixed first-quarter performance. On April 17, the company announced earnings per share of $1.37, beating analysts estimates of $1.35 and topping the same quarter last year by 2 cents. It also announced quarterly revenue of $16.1 billion, which falls short of the $16.26 billion analysts were estimating.

Sales results in the U.S. were hit hard after the company's patent for bacterial infection treatment Levaquin expired, opening the door to generic competition. A manufacturing suspension at a third-party supplier for the cancer treatment drug Doxil also played a role in depressing returns. For the most part, the growth the company enjoyed was thanks largely to its Neutrogena skin care product line and strong international sales of oral care products. The line includes Remicade, a biologic approved treatment for a number of immune-mediated, inflammatory diseases that is distributed through an agreement with Merck (NYSE:MRK), and Velcade, a treatment for multiple myeloma, along with several other recently launched products.

Overall, Johnson & Johnson's quarterly performance was not that bad, and it is still in a decent position. The stock recently traded for $63 a share and carries a mean one-year target estimate of $72, making for over 14% predicted upside. In addition, Johnson & Johnson pays a $2.28 dividend (3.60% yield). Last year, the company earned $5 per share, up from $4.76 in 2010. Analysts are expecting the company to earn $5.13 this year, $5.44 next year and $5.88 in 2014. At its Johnson & Johnson's current trade price, the company is priced at just 11.58 times its 2013 earnings.

A forward price-to-earnings ratio this low is a bargain by any measure but especially in comparison to the company's peers, which are priced, on average, at 16.59 times their future earnings. Of course, companies can be priced at a discount to others in their industry for all sorts of reasons, from a market inefficiency (a good thing) to lower future growth expectations (not so good).

To get a better idea of Johnson & Johnson's position, let's take a look at its closest competitors - Pfizer (NYSE:PFE), Merck , Abbott Laboratories (NYSE:ABT) and Bristol-Myers Squibb (NYSE:BMY). Johnson & Johnson is the largest of the group by market cap, at $174.0 billion. Pfizer is next at $169.2 billion, followed by Merck at $116.8 billion, Abbott at $95.1 billion and, lastly, Bristol-Myers Squibb at $56.7 billion.

Pfizer recently traded at $22 a share and has a mean one-year target estimate of $25 a share. This combined with its 88 cents dividend (3.90% yield) and it has roughly the same predicted upside as Johnson & Johnson. Pfizer is priced lower than Johnson & Johnson with a forward price-to-earnings ratio of 9.48 but analysts are expecting the company's earnings per share to fall this year. They expect Pfizer's earnings will go from $2.31 a share in 2011 to $2.27 a share in 2012, rising to just $2.35 in 2013 - in other words, the growth just is not there.

Pfizer is currently reshuffling its business mix to avoid that fate. Last spring, the company sold its capsule coatings business to Kohlberg Kravis Roberts for $2.4 billion. More recently, Pfizer is looking for a buyer for its baby formula business. That division brought in $2.1 billion in revenue for the company last year and is rumored to be amongst the company's faster-growing businesses. Nestle is said to be the top bidder right now. It could work out for the best, or Pfizer could be selling one of its best parts. It all depends on how well the company shuffles its deck. I would not recommend getting involved just yet, unless you are willing to take a risk.

Merck is trading at $38 a share with a one-year target estimate of just over $41 a share, making for a projected upside of almost 8%. Merck also pays a $1.68 dividend (4.40% yield). The company earned $3.77 a share last year. Analysts are expecting roughly the same next year, forecasting an earnings per share of $3.80 for this year, falling to just $3.70 a share in 2013. This puts its forward price-to-earnings ratio at 10.30, but that really is not any surprise given its low earnings expectations.

Part of the loss could stem from charges relating to the company's illegal marketing of the drug Vioxx. Merck recently plead guilty to a criminal misdemeanor charge relating to that point as part of a $950 million settlement that the company sold the drug for unapproved uses. Merck is also facing more than 2,300 lawsuits relating to its drug Fosamax and allegations that it causes jaw problems. To date the company has won five of the six lawsuits that have made it to court, but there are still hundreds left - hardly encouraging.

Next, let's look at Abbott. It recently traded at $60 a share with a mean one-year target estimate of $63.44 a share, making for an upside of almost 6%. In addition, Abbott pays a $2.04 dividend (3.40% yield). Analysts are bullish on this company. They expect its earnings will rise from $4.66 a share last year to $5.03 this year and $5.35 next year. This gives Abbott a forward price to earnings ratio of 11.11, so it is fairly on par with Johnson & Johnson in terms of growth and pricing only analysts do not expect the company's share price to rise as favorably in the next year.

The hesitation is, in my opinion, due to Abbott's upcoming split. No matter how well-organized a company, there will always be a transition period and separating its lower growth drug business from its device and diagnostics business is a big move and it is hard to say just how things will turn out. Personally, I don't think the upside is worth the risk when there are companies like Johnson & Johnson, which are positioned just as well.

Lastly, let's take a look at Bristol-Myers Squibb. It recently traded at just under $34 a share and has a mean one-year target estimate of just $33 a share. The company does pay a $1.36 dividend (4.10% yield). Analysts are expecting the company's earnings will fall this year and next, going from $2.28 a share in 2011, to $1.97 in 2012, and $1.94 in 2013. With numbers like this, I would not recommend investing in Bristol-Myers Squibb right now. It is not even priced low - it has a forward price-to-earnings ratio of 17.49 - and even if you think the company is good in the long term, the price will surely drop further.

Source: Johnson & Johnson: Synthes Approval Will Push Stock Higher