We wrote an article March 21 defining the strengths and weaknesses of Johnson & Johnson (JNJ) and how it continued to perform well for analysts. Inevitably we are asking: when is a good time to invest in the company long term? The company is a very good dividend stock and will continue to perform this way. It has been moving up for 24 months now at a snail's pace. So when is a good long-term investment possible?
If the stock continues to move at the same pace it has been moving, it will grow on average about 3.25 percentage points a month in value. Presently it is trading at $65.21 and analysts are mixed on what to do with the stock.
Goldman Sachs gives it a price target of 65 and states that even though earnings were good, the suits continue to cloud the news and bring challenges in its Consumer and MD&D business.
Citigroup, on the other hand has given them a buy rating with price target of 77 and they believe the company will show accelerating performance the rest of the year and gain on its peers."
The stock has not moved much at all since June of last year and we do not see improvement coming while the company deals with all its legal issues. Earnings estimates were raised for the year, but a good percentage of that was based upon currency exchange rates. And it was not that much either-($507-$517) That's all well and good but at the same time Global consumer sales were $3.6 billion, down 2.4% from last year. U.S. sales fell 2.2% and international sales declined 2.5%. This is due to the many legal suits it is facing.
Quite honestly, Johnson & Johnson has a great customer image problem that is going to take time to get over. J&J got 40 percent of its revenue from medical devices, 37 percent from pharmaceuticals and 23 percent from over-the- counter products in 2011. It is in the medical devices and over the counter products that the legal issues have been raised. Here are a couple examples:
- Recalls of artificial hips as the company faces more than 6,000 lawsuits from patients who received faulty artificial hips that were recalled in 2010.
- Quality issues that led to the recall of hundreds of millions of packages of Tylenol, Motrin, Benadryl and other over-the-counter consumer products.
The over the counter consumer products are really going to take a beating, as they are not expected to get back on to the shelves this year. It is taking longer than anticipated to correct problems for the recalled drugs. It will be 2013 and some analysts believe it will be 2014. Then they have to win consumers back again.
With sales down in key areas, the company might be able to offset those losses with the new pharmaceuticals coming out, but it is going to be a long struggle. We do not see a lot of value growth in the company and continue to look for short term income opportunities in the stock.
Click to enlarge.
The Options Play
- Buy a July put with a '65'strike (priced at $1.52)
- Sell a July put with a '62.5' strike priced at $0.64)
- Net Debit to Start: $0.88
- Maximum Profit: $1.62
Reasoning behind the Trade
- We believe the stock will continue to move in a sideways pattern through the rest of the year.
- Consumer confidence is shaken and will have to be built back up, but products need to be put back on the shelves, and that won't happen soon.
- Lawsuits will dig deep into profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.