Mega large cap Johnson & Johnson (JNJ) has long been among my favorite big cap stocks. I thought it appropriate, in this era where so many competitors have fallen off patent cliffs, to see how Johnson & Johnson is holding up.
In its first quarter of 2012, Johnson & Johnson reported sales of $16.14 billion, off 0.20% from the first quarter of 2011, when sales were $16.17 billion. All of this decrease, and more, was due to negative currency adjustments, which had the effect of reducing revenues by 1.2%. Earnings came to $3.91 billion or $1.41 per share, a nearly 13% advance from last year's quarterly $3.48 billion, or $1.25 per share. Tight expense controls swelled the profit margin by 270 basis points, to 24.2%. If we take out the panoply of one-time factors that management considers as one time, earnings eked out a modest advance, from $1.35 per share last year to $1.37 per share this year.
Much of Johnson & Johnson's efforts the past year have been the acquisition of Swiss orthopedics maker Synthes. The $21 billion dollar deal is the largest one-time transaction in Johnson & Johnson history, and gives us some direction of the future of Johnson & Johnson. The company is as well known for its baby shampoo and Tylenol as for its pharmaceuticals and surgical equipment. This transaction gives Johnson & Johnson a substantial, global presence in the market for orthopedic devices. And, from there the logic goes that an aging global population will make orthopedic procedures increasingly more common. The logic, at least in this country, is compelling when one considers that some 10,000 Americans reach their 65th birthdays each and every day, through the next twenty years. And increasingly, these older individuals will be insisting on maintaining their recreational abilities.
When it comes to a stable and secure company, it is hard to beat Johnson & Johnson. Its unparalleled offerings of non RX medical remedies and treatments means no single pharmaceutical drug patent expiration will deal too serious a blow. So, while AstraZeneca (AZN) struggles mightily after losing blockbusters to patent expirations, and Pfizer (PFE) works to overcome the loss of Lipitor, resulting in near certainty of lower earnings in 2012. Johnson & Johnson earnings has increased 28 consecutive years, and the company has raised its dividend now 49 years in a row. The yield is currently 3.5%
Even the best of companies are run by human beings, and mistakes do occur. Johnson & Johnson has had than its fair share of problems with its over the counter medicines. I first noticed that while searching my local store for Benadryl, it is not offered! The vast majority of product of the wholly owned McNeil Laboratories has been recalled. Tylenol, Benadryl, Motrin, and a total of 40 different products were recalled, and many will not be available until 2013. By that time, perhaps many will realize that generic equivalents work the same as the brand name stuff. This is a long term blow for the over the counter medicines division. Second, while Johnson & Johnson is working to grow its medical device business, it is dealing with the aftermath of its enormous artificial hip program recall.
Perhaps at least in part to these problems, Johnson & Johnson stock has gone nowhere in the last year. It has traded in the narrow range of between $60 and $68 per share since April, 2011. Analysts see earnings advancing an average 6% annually over the next five years. With its growing dividend, strong balance sheet, and stability, this is the perfect buy and hold stock for conservative investors.
A midsized pharmaceutical company worthy of consideration by more aggressive investors is Valeant Pharmaceuticals (VRX). What stands out first and foremost about this Canadian company, is that is has virtually no patent expiration issues over the next five years. But more than that, it is a company seeking growth, whether organic or through acquisition. That surge of smaller acquisitions has made Valeant's earnings picture a mess. Excluding a slew of one-time factors, earnings for the first quarter of 2012 were $179 million, up 16% from the year earlier quarter. This came to $0.99 per share, a penny ahead of analysts' estimates. Acquisition enhanced revenues for the quarter were up 52% versus the year earlier quarter, to $856 million.
Valeant's stock has been on something of a roller coaster ride as analysts tried to digest the company's complicated earnings picture. But over the longer run, analysts foresee earnings rising some 16% per year, driving the five year PEG down to about 1.0.
Valeant's acquisitions have largely been in Latin America, and have given the company a strong foothold in that growing market. Its propriety prescription drugs, Acanya, Atralin, and Zorivax all grew by double digit amounts in 2011 versus 2010, and the company though its acquisitions is establishing a solid pipeline.
For those with a willingness to take on some risk, I believe Valeant offers excellent long-term growth potential within this sector.
Forest Laboratories (FRX) is a mid-sized pharmaceutical on the verge of shrinking itself to oblivion. The company recorded annual revenues of over $4 billion in 2010. This year, it will be lucky to achieve half that revenue. Its lead drug, Lexapro, recently lost patent protection, and its number two drug, Namenda, loses patent protection in 2015. While Levomilnacipran and Cariprazine are both showing promise in Phase III testing, there are no guarantees the FDA will grant approvals, nor is it likely these medications will replace the revenues lost from declines in Forest's existing portfolio.
It is going to be a dismal 2012 and likely an equally awful 2013 for Forest, with earnings near $1.25 per share both years. The company's balance sheet is in fine shape and would allow for acquisition. And there has been mention of Forest as a takeover candidate. But on its own, Forest is a company best avoided by most investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.