If you have been following Johnson and Johnson (JNJ) in 2012 its performance has been just a degree above lackluster. Another important acquisition was taking place but the markets were not particularly thrilled until something happened just before mid June that sent the stock shooting up (12% to 15%) in a short three day period. This event could be a precedent for future companies and how they approach acquisitions. With this quick success, can J&J maintain the move like it did?
The event that changed Johnson and Johnson so quickly was the acquisition of the Swiss medical maker Synthes. The $19.7 billion deal made JNJ a prominent player in the orthopedic surgery business while opening strong markets in Russia, China, & India are strong markets. The merger itself was not something that was highly anticipated by investors. Originally, J&J projected that the financing would take 22 cents off of yearly estimated profits.
But things changed. And what made investors suddenly pull an about face was the creative financing that took place saving the company millions in taxes that would have to be paid to Uncle Sam. If I may create a quick summary:
- It is using a "brilliant" $12.9 billion stock swap between its Irish subsidiary, Janssen Pharmaceuticals, and its bankers JPMorgan and Goldman Sachs to minimize its U.S. tax bill.
- Instead of repatriating its foreign earnings held in Ireland through a taxable dividend, as the Internal Revenue Service established in 2011
- J&J is using the acquisition and stock swap to utilize its non-U.S. earnings without incurring the tax charges of repatriation.
So what is the difference?
All that money that is not going to the U.S. in taxes and is being saved by J&J, and now going back to earnings. Analysts have taken notice and it has created a huge difference for the company.
Jefferies analyst Jeffrey Holford, upgraded its shares to buy with a price target of 72 while the stock is presently trading at 67.56. He believes this creative financing could turn everything around for the company and believes the acquisition will now increase the company's earnings by 3% in 2012 and up to 5% a year through 2017. And right now, investors are looking for strong companies with dividends because it is the best way to create an income right now with interest rates so low. Dividends are outperforming everything else.
In summary, not only did J&J save a lot of money that would have to go to Uncle Sam in the form of taxes, but it also increased its dividend projections (3% to 5%) for the next 5 years. Investors like large stalwarts like Johnson and Johnson they can count on and the investing "season" is ripe for a company with increasing dividends. This is the reason the stock shot up so far. Now, can J&J maintain this growth or was the quick rise in stock a fluke that will back track here?
I believe J&J's continued success will work. I think it will progress upward from here and will be helped by its Pharma segment as a present drug-Zytiga, may add significant growth to revenue. Zytiga could literally double its sales. Analysts believe that both U.S. and European regulators will soon approve the prostate cancer drug for patients who've never had chemo. This would open up a whole new market tripling its present size. Zytiga's present market is made up of post chemo patients, but there are almost twice as many pre-chemo patients out there. Just the Pharma industry for J&J is expected to grow by 10% the last part of 2012.
Between the creative financing, increased earnings, and new markets for Zytiga, I believe the stock will continue to move up. The price increase was fast and steep, but I believe it was no fluke, it is here to stay!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.