Johnson & Johnson Could Slip 5% On Lower Margins

| About: Johnson & (JNJ)

Johnson & Johnson (NYSE:JNJ) seems to be paying out a lot more money than it is bringing in these days. Although some of these payouts could be considered investments in future revenue, the company might be getting off balance, which could spell disaster for investors. Additionally, with doctors and patients outraged over drug scandals like the recent discovery of high levels of chromium in certain capsules, consumption could decline, leaving Johnson & Johnson and others with empty pockets. Unless the company can find a way to seriously cut down on costs, I expect to see profits down in the next few weeks, and this is one stock that can't really afford any more losses.

Although the company is accused of using old leather shoes to produce industrial gelatin for its capsules, the impact could spread to all manufacturers. In this way, Johnson & Johnson's already tarnished reputation could take another hit, so that medical care providers and consumers might turn away from traditional medicine. In other news, the company has been fined $1.1 billion by an Arkansas court over misinformation relating to its anti-psychotic medication known as Risperdal. The drug has been under investigation since 2003, so a lot of people have probably used it in that time, unaware of health risks that go along with it. Since the company's patent expired in 2007, I doubt that the loss of this market will carry serious repercussions in terms of revenue, but it definitely will not help the stock get back on its feet either, in my view, especially since the fine will bite a chunk out of Johnson & Johnson's liquid cash.

The first quarter report from the company also indicates a problematic cash flow, in my mind. Gross and operational margins shrank, leaving only net margin to increase. However, overall the stock performed as expected, and GAAP EPS was up compared to the year-ago quarter, in spite of sales falling 0.2%. The stock did little to impress investors, and any growth appears to have been very minimal, as far as I can tell.

Other companies also appear to be facing a loss in profits. In Germany, Merck (NYSE:MRK) is cutting staff and slashing costs wherever possible. It looks to me like the company is desperate to maintain its margins, but in terms of reducing operational costs, trimming down the number of employees could have a significant effect. Thus, at least the board of directors appears to be handling the situation intelligently, even if they are being somewhat secretive by not explaining the actual sum that they hope to save, or the reasons for doing so.

Both Pfizer (NYSE:PFE) and Eli Lilly (NYSE:LLY) are facing similar problems. Lilly CEO John Lechleiter said right out that saving money might not be enough to keep the company afloat in the midst of a major decline in sales. Both of these companies are or soon will be losing money to cheaper and more readily available generic versions of certain drugs, and Lechleiter believes that the right course of action is to push ahead with new medications to fill the void. I believe that this might be a hopeless chase, since it takes a long time to test a drug before it appears on the market. In that time, the company could have lost a significant portion of its market share, in my opinion. Even Amyvid, Lilly's latest supposed breakthrough, a recently approved imaging test for Alzheimer's, comes with a label essentially warning that the tests are not very accurate. This looks like a lack of confidence on the company's part, as well as a rush to get something new on the market, perhaps. If the latter is true, then the company could be in worse shape than we thought.

The Switzerland-based drug manufacturer Novartis has also been stirring up distrust of its products, with a hepatitis test drug causing death in one of the study participants and adjustments to the label of a multiple sclerosis treatment to indicate the extent of risk associated with heart problems. While the first incident occurred in the testing phase, I don't think that many consumers will distinguish between a finished product and one that is still in the works in terms of their own safety. These dangers could push down sales even further, and not only for Novartis, since I would guess that most people see all pharmaceutical companies as one and the same.

With money flowing out and not much coming in, Johnson & Johnson could be in serious trouble, as I see it. The stock has shown no sign of really picking up lately, and I do not believe that the company is in a very stable condition right now. My advice to shareholders would be to consider pulling out now, while a profit can still be made by selling, because I see no reason to believe that the company knows how to get itself out of this rut. Amidst a widespread recall of over-the-counter medicines including Tylenol, which has been going on since 2010, the company recently announced that the factory where the problem originated will not be up to par until next year, and it will cost most money than originally expected.

I predict that margins will continue to shrink for this stock, and it will have to pile on an undesirable debt load for itself. Neither option is very pleasant for investors, since they could be facing a major loss in the near future. I anticipate the stock will dip to around $60 in the next 1 to 2 months before bouncing back.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.