Johnson & Johnson (JNJ) is struggling but we do not think the stock will stay down for a long period of time. It is making good expansion plans for the future and this is good for long-term investors. And it also introduces a short-term income play on the stock.
It is not a secret that Johnson & Johnson has struggled as of late with an image problem due to less than stellar manufacturing quality! Recently, one of its companies- McNeil Consumer Healthcare, started retrieving a lot of Imodium--nearly 54,000 packages. There is no health threat, just a hole in some packages that, because of exposure, might reduce the diarrhea drug's effectiveness. Johnson & Johnson health unit has recalls down to a science, and since December has had to recall over 12 million products, from children's Tylenol for a stopper problem to Motrin tablets with a dissolution issue. This is an unfortunate reminder to Alex Gorsky that he has huge manufacturing problems to deal with and he has to get control of the situation. It is no surprise that his predecessor Bill Weldon was probably asked to retire early in the face of the constant march of recalls.
This was a struggle but when we put the company into long-term perspective, since 2009, J&J has pulled consumer products. Although its over-the-counter drug brands are well known, the consumer segment is also the company's smallest. And it is small by $9.5 billion in sales. Yes - U.S. consumer sales have dipped the last few years. It increased in 2008 by 8.3% but it has steadily declined since then. In 2009 it was 1.9%; in 2010 19.3% and 2011 6.7%.
But the future of the company will be in devices and possibly pharmaceuticals. If you can get a picture of its growth plans, look at China as an example. Thad Huston, president of J&J's Xian-Janssen Pharmaceutical Ltd. unit, said it is interested in buying Chinese companies or products in mental health, oncology, immunology, vaccines and over-the-counter drugs. The company wants to build a large portfolio here. Drug spending in China is forecast to grow at a compound annual rate of 19 percent to 22 percent in five years. There is no other nation with a forecast to grow this quickly. Johnson & Johnson plans to introduce two to three new drugs to China every year. It will start by introducing Invega Sustenna, a monthly injection to treat schizophrenia. Chinese social stigma due to families' embarrassment about mental illnesses means most patients do not get treated.
The company is currently trading at 63.47 and is in a bearish pattern with a peak and valley formation. It is sitting at the bottom of the Bollinger Bands and we expect it to move up. If it continues to move up in the same pattern, we expect it to hit close to the '65.00' level before it turns back down again. We can see a short-term income play here using an Option Spread to help reduce risk.
The Options Play
- Sell a July 2012 call with a '65' strike (priced at $0.54)
- Buy a July 2012 call with a '67.50' strike (priced at $0.15)
- Net Debit to Start: $0.39
- Maximum Profit: $2.11
Reasoning behind the Trade
- We do not see a huge profit like the potential shows on this play.
- When the stock hits '65' a reversal in the stock play should be able to bring a profit.
- The stock is at the bottom of the Bollinger Band so we see it moving up.