Valuing Drug Stocks, Part II

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 |  Includes: ABT, JNJ, MRK, PFE
by: CRG Research

In this article, we'll examine the financial performances and positions of Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK), Pfizer (NYSE:PFE), and Abbott Laboratories (NYSE:ABT) in the first and second quarter of 2012. Further, we'll take a look at the effectiveness of management.

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Revenue
  JNJ MRK PFE ABT
Q1 2012 16139 11730 14885 9456.6
Q2 2012 16475 12311 15057 9807.1
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All four firm's second quarter revenue increased compared to first quarter revenue. Johnson & Johnson's revenue increased 2 percent. Merck's revenue increased 5 percent. Pfizer's revenue increased 1.2 percent. Abbott's revenue increased 3.7 percent. The pace of growth impacts valuations. Firms with higher growth rates are sometimes rewarded with higher relative valuations.

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Net Income
  JNJ MRK PFE ABT
2008 3910 1738 1794 1242.1
2009 1408 1793 3253 1724.6
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Net income increased in the second quarter compared to the first quarter for all firms except Johnson & Johnson. Johnson & Johnson's net income declined 64 percent. Merck's net income increased 3.2 percent. Abbott's net income increased 38.8 percent. Pfizer's net income increased 81.3 percent. Abbott's and Pfizer's net income increased substantially more than revenue increased and we'll have to factor that into the valuations.

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Total Assets
  JNJ MRK PFE ABT
Q1 2012 116194 105509 185683 62415.8
Q2 2012 115750 105525 182842 61859.8
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The total assets of all four firms either decline or were flat in the second quarter of 2012 compared to the first quarter. Pfizer has the largest asset base followed by Johnson & Johnson. Abbott has the smallest asset base.

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Total Equity
  JNJ MRK PFE ABT
Q1 2012 61366 54860 83256 25453.7
Q2 2012 60434 55194 79547 24487
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In the second quarter of 2012 compared to the first quarter of 2011 total equity was little changed for all four firms. Pfizer has the largest book value of equity followed by Johnson & Johnson.

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In the first half of 2012, Merck continued to increase its share of revenue. Johnson & Johnson increased its share of revenue. Pfizer's share of revenue declined and Abbott's share of revenue was flat.

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We are seeing a continued decline of Johnson & Johnson's net profit margin. Merck's profit margin increased compared to 2011. Pfizer increased profitability. Abbott's profitability improved. Profitability weighs heavily in my investment analysis.

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Abbott should be the leader in return on assets in 2012. Pfizer is well positioned to increase return on assets this year. Merck's return on assets should be splendid.

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Abbott's management is doing an amazing job this year of generating return on equity. Pfizer's management is as well. Johnson and Johnson's management is hitting a stumbling block recently.

To be continued...

(The data is courtesy of Reuters.)

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.