Seeking Alpha
Research analyst, portfolio strategy, portfolio management, long/short equity
Profile| Send Message|
( followers)

With apologies to Neil Sedaka, I think that contrary to what Neil might think about breaking up, I cannot see any problem whatsoever if Johnson and Johnson (NYSE:JNJ) were to finally split up.

As a matter of fact I can think of about 90% of all individual and institutional stakeholders that would rally around that event in a most harmonious way!

Johnson & Johnson (<a href='http://seekingalpha.com/symbol/jnj' title='Johnson & Johnson'>JNJ</a>)

The stock is trading near its 52 week low of around $60 bucks per share, and the dividend yield is now almost 4.0%. These are reasons enough to buy some shares now, and then when we add in the incredible track record of shareholder returns over the years, as well as the pipeline of products that are just about ready to pop, what else would move the needle for you?

Amazingly this is not even the real story here.

To Break Up Or Not To Break Up

The drum beats are getting louder for JNJ to morph itself into three separate companies; Big pharma, consumer products, and medical devices.

Take a look at the compelling argument that Goldman Sachs (NYSE:GS) makes for a very timely move:

There are several strategies through which we think new CEO Alex Gorsky can generate higher returns for JNJ; however, we see a break-up (into Pharma, Consumer, and Medical Devices and Diagnostics) offering the most potential for upside.

As a new CEO, I would want to make an impact and place my stamp on this idea, wouldn't you? The article continues:

As standalone companies, these entities could be leader in their respective industries (based on sales and market share) and generate higher returns for shareholders than as parts of a conglomerate. On an operational basis, we believe that JNJ's businesses, separated as independent companies, would benefit from being more focused and potentially achieve peer group performance levels (growth trajectory and profitability), or better. Over the past few years, JNJ's Consumer and MD&D businesses have underperformed their peer groups (sales growth and market share), in our view due in large part to underinvestment (e.g., reduced R&D spend in MD&D) and a lack of focus on the specific needs of each business. Further the growth prospects, management philosophies and investment requirements are different for each of these companies, and, in our view, the full merits of each business are not fully understood within a conglomerate structure.

Better focus, no overlap, and stronger management into each area. Sounds like a winning strategy to me! The PPS that Goldman has placed on this event is $76/share for JNJ. That would be a 20% premium based on today's price-tag, and considering the yield now, would be an even better situation I would think.

Jim Cramer of CNBC chimed in on this:

In this awful environment, Johnson & Johnson's the kind of stock you can circle the wagons around, with recession resistant businesses and a high yield," Cramer said. "Plus, if the new CEO follows Goldman Sachs' advice and breaks up the company, you've got a giant reward with an incredibly low amount of risk.

Even for Cramer this is pretty heady stuff to toss out there!

Truth be told, even Goldman acknowledges that Johnson and Johnson might be looking in another direction. They note:

We acknowledge that JNJ's management team has given no indication of following this strategy, and interviews with Mr. Gorsky indicate his preference for getting bigger, not smaller.

OK, so for now it does not look like there is any consensus and I would not load up on the stock based solely on a potential break up.

I would, however, think about "loading up" because of what JNJ has right now;

This article gives some insight into a drug that is already producing revenues (Zytiga) in the neighborhood of $200 million plus and if the recent findings are found to be accurate (and there seems to be no reason not to) then this drug alone could be a billion dollar bonanza:

Zytiga, a pill, was first approved in 2011 as a treatment for prostate cancer patients who have previously been treated with chemotherapy. The new data released for the first time Saturday open a much larger commercial opportunity for J&J because if approved, Zytiga will become a treatment option for men with less advanced prostate cancer.

This would truly be an amazing advance for men with prostate cancer. Options without chemo OR surgery could potentially be a game changer!

A formal presentation of the Zytiga phase III data is scheduled for 9 am EDT at the ASCO meeting. J&J is expected to seek regulatory approval later this year to expand Zytiga's label to include treatment for "pre-chemo" prostate cancer patients.

Let's not forget that there is another drug ready to go which could even TOP Zytiga, as noted in NJ.com:

Johnson & Johnson said it has filed for marketing approval to the Food and Drug Administration of its drug Canagliflozin, a once-per-day pill intended to treat Type 2 diabetes.

Canagliflozin is one of Johnson & Johnson's most promising drug candidates.

These two drugs alone can potentially mean billions for JNJ, and THAT should be the number one reason to jump on their shares at these levels.

After that, breaking up might be EASY to do!

Disclosure: I am long JNJ.

Source: Johnson & Johnson: Breaking Up Is Not Hard To Do