Johnson & Johnson a Compelling Investment

Johnson & Johnson (NYSE: JNJ) 1-Year Chart vs. S&P 500 Index and Pharma HOLDRS (PPH)

Johnson & Johnson (JNJ) reported record sales and profits that beat expectations for the 2Q08 before the market open yesterday. The stock has been a solid performer, illustrated in the 1-year chart above which compares JNJ versus the S&P 500 Index versus the 21-stock Pharmaceutical HOLDRS Trust (PPH). JNJ is trading within $2 of all-time highs reached in April 2005, closing Tuesday up 2% at $67.70 per share. Sales for 2Q08 were up 8.7% compared to the year-ago period at $16.5 billion. Fully-diluted profits came in at $3.3 billion for 2Q08, which equates to $1.17 per share in earnings. The Company also raised its guidance for full-year earnings to a range of $4.45 - $4.50 per share. The consensus estimates for Wall Street analysts were for profits of $1.12 per share and sales of $16 billion for the quarter.

Worldwide medical devices and diagnostic sales increased by 12.3% to $6.1 billion for 2Q08, accounting for about 37% of total sales for the quarter. Consumer sales accounted for 24.2% of all sales at $4 billion with growth of 13.2% from the year-ago period. Consumer healthcare sales were driven by strong sales for the over-the-counter launch of allergy medicine Zyrtec, the Listerine family of products, and Neutrogena skin care products. Pharmaceutical sales for the quarter came in at $6.3 billion or 38.2% of total sales, but grew by just 3.1% from the year-ago period.

Pharmaceutical sales experienced an operational decline of 1.3%, but gained 4.4% from favorable currency exchange due to a weak dollar. Strong sellers in the prescription drug market included Topamax (an antiepileptic and a treatment for the prevention of migraine headaches), Velcade (a treatment for multiple myeloma) and Remicade (a biological treatment for several immune-mediated inflammatory diseases). Weak sales results came in for Procrit (an injectable anemia treatment which belongs to a class of drugs being closely scrutinized by the FDA) and Risperdal tablets (an anti-psychotic medication with recent generic availability).

Trading at forward price-to-earnings multiple of below 15 and a healthy dividend yield of 2.8%, JNJ represents a compelling investment for investors seeking a defensive play with reliable growth prospects and global reach. The Company is poised to break through its all-time highs from April 2005 and move above the $70/share level by the end of the year as investors migrate to blue-chip, mega-cap companies with reliable earnings and growth. As a leader in the healthcare sector with a $191 billion market cap, JNJ meets all of these qualifications.

Comments

[Ames Tiedeman:]

This is one of the few stocks that I think you can buy and hold for 25 years and not worry too much. What a great story this company has been. Compare them to some other major American corporations and it just reminds all of us how important good products and good management really is. Never underestimate the ability for a few smart guys to completely destroy a great company. Let us hope JNJ continues to avoid such a pit fall.

2008 Jul 18 07:48 AM