Johnson & Johnson Uncertain About Recessionary Impact

Johnson & Johnson (JNJ) said in its conference call with securities analysts yesterday that while it historically has been pretty recession proof, the uniqueness of current economic conditions is creating enough uncertainty that it is unwilling to predict its some 250 consumer and healthcare businesses won't be affected by a recession.

The company slightly increased its guidance for 2008 after reporting a 2.6% increase in operational revenues for the first quarter. Its medical device revenues were flat in the U.S. Options traders and analysts think the stock is a buy.

Technicals are mixed. JNJ did not comment on the impact of rising deductibles and co-pays or on the possible impact of a recession until it was asked about a possible recession by an analyst. I have warned about the impact of rising deductibles and a recession on health care companies here and about the impact of soaring co-pays here.

Unlike some other companies, including GE Healthcare (GE) and Koninklijke Philips (PHG), JNJ's executives didn't report any negative effects of the Budget Deficit Reduction Act of 2005 (PL 109-171, which is known as the "DRA") on its first quarter results, and analysts didn't ask.

Investor's Business Daily (investors.com) reports that JNJ's earnings per share rating is a 69, its relative strength is a nice 79, its group strength relative rating is B+, its profitability rating is A and its accumulation/distribution rating is B. The A/D rating, Investors.com says, means that JNJ "has been experiencing moderate buying, based on its daily price and volume changes over the last 13 weeks." Morningstar.com says JNJ is a five-star stock with an estimated fair value of $80. M* says consider buying the stock at $68 and consider selling it at $96.

In the options markets, JNJ appears to be considered a relatively low risk investment based on the low returns offered on May's covered calls. The JNJ May 65 call offers a 17.4% annualized return to investors who buy the stock and sell calls on an equal number of shares. The higher the annualized return, the greater the risk in the stock. The January 2009 65 calls would breakeven at about $69.40. The January 2010 65 calls suggest the stock will hit about $72 before expiration.

However, with the implied volatility of JNJ at about 21% compared with a historical volatility of about 12.6%, those leaps look pretty expensive. Daily charts for JNJ, GE and PHG are here. Click on a chart to see weekly and point and figure charts for a stock. JNJ's point and figure chart shows a bearish price objective of $53. On Tuesday, the stock closed at $65.65. Clearly, opinions on JNJ are mixed but bullish.

The JNJ announcement said:

Johnson & Johnson today announced record sales of $16.2 billion for the first quarter of 2008, an increase of 7.7% as compared to the first quarter of 2007. Operational growth was 2.6% and currency contributed 5.1%. Domestic sales were up 2.8%, while international sales increased 13.7%, reflecting operational growth of 2.4% and a positive currency impact of 11.3%. Net earnings and diluted earnings per share for the first quarter of 2008 were $3.6 billion and $1.26, respectively. The first quarter of 2007 included an after-tax in-process research and development charge of $807 million associated with the acquisition of Conor Medsystems, Inc. Excluding this charge, net earnings for the current quarter and diluted earnings per share represent increases of 6.4% and 8.6%, respectively, as compared to the same period in 2007.

The Company raised its earnings guidance for full-year 2008 to $4.40 - $4.45 per share, which does not include the impact of any in- process research and development charges or other special items.

Full disclosure: I don't own JNJ, but my investment club does.