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Johnson & Johnson, a company that is over a century old, is widely known for its baby products, Band-aid, Tylenol and Acuvue contact lenses. Johnson & Johnson also derives a large part of its revenue from the sale of drugs and medical devices.

According to a recent government forecast, U.S. spending for health care may double to $4 trillion by 2015, propelled by an aging population using more drugs, hospital care and technology. The cost of prescription drugs will also double and will amount to $446 billion. With operations in over 50 countries worldwide, Johnson & Johnson ties in well with two established themes that I'm current following -- international investing and investment in the healthcare sector.

Johnson & Johnson's failed bid to buy Guidant (GDT) for $20 billion had put downward pressure on its stock, creating an excellent buying opportunity. Johnson & Johnson even walked away with a $720 million break-up fee when the Guidant deal did not go through. J&J recently received a 5 star rating from Standard and Poor's.

Johnson & Johnson is a highly profitable company with a profit margin of 20.61%. Its dividend yield of 2.3% compares favorably with the 1.92% dividend yield of the S&P 500 and is inline with the 2.39% dividend yield of the Dow Jones Industrial Average. JNJ also has a 40-year history of raising dividends.


Johnson & Johnson faces competition from Merck (MRK), Pfizer (PFE) and Switzerland's Novartis (NVS) in its pharmaceutical business. It faces competition from Procter & Gamble (PG) in its consumer products division and Boston Scientific (BSX) in its medical devices business. Boston Scientific emerged the victor in the bidding war for Guidant after agreeing to pay $27.2 billion.

The Good:
* A highly profitable company with a strong balance sheet. Total current assets are more than double the total current liabilities.
* Johnson & Johnson is expected to grow sales by 8% and earnings by 10% in the coming years, which is higher than the average growth expected from pharmaceutical companies.
* Attractive current valuation with a current P/E of 16.68 and forward P/E of 14.31.

The Bad:
* Like most large companies, organic growth at Johnson & Johnson could be limited.
* Strong competition for potential acquisition candidates from other cash rich pharmaceutical companies.

The Numbers:

P/S 3.40 Cash $14.83 Billion
P/E 16.68 Long Term Debt $2.14 Billion

JNJ 1-yr Chart

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Source: Failed Guidant Bid Creates Buying Opportunity in Johnson & Johnson (JNJ)