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

 |  Includes: BSX, JNJ, MRK, NVS, PFE, PG
by: Asif Suria

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 (NYSE:MRK), Pfizer (NYSE:PFE) and Switzerland's Novartis (NYSE:NVS) in its pharmaceutical business. It faces competition from Procter & Gamble (NYSE:PG) in its consumer products division and Boston Scientific (NYSE: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
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JNJ 1-yr Chart

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