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PSalerno
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Private full time investor since 1994, graduated in medicine, with interests in art and philosophy coming from Italy and living in Hungary, dealer in old masters painting until 1996. Overcame 2 big market crashes in 2002 and 2008. The strategy is to divide the assets in 2 categories: the first... More
  • SOME POINTS ABOUT JOHNSON & JOHNSON 0 comments
    Apr 8, 2013 5:24 AM

    Johnson & Johnson(NYSE:JNJ) is a largely covered stock, may be with too many articles on this blog, but I have to ask some corrections having some points to address versus some of them.

    The worst articles say that JNJ is overpriced (Markos Kaminis "Sell Johnson & Johnson As It Is Over Extended") with PE of 20 or so, or that JNJ "has been spending steadily less by R&D" (Sarah Maller "Johnson & Johnson: Throwing In The Towel"). The former does not consider the non recurring items, the latter statement is false.

    Even the slightly better articles written by Tim Mc Aleenan J. ("Johnson & Johnson Is Not As Expensive As You Think") or by Trevis (Johnson & Johnson's Equity Doesn't Offer Compelling Margin Of Safety At Current Prices") fail to see the global picture.

    1 - McAleenan recognized the non recurring items caused by the recalls and litigation, but they are not the only charges.

    The biggest charge was associated with the acquisition of Synthes.

    JNJ issued shares for that acquisition and then bought back almost all the issued equities (around 13 Billion).

    Anyway, at least he is correct pointing out that the EPS, excluding non-recurring items, is 5.10, while many other authors are considering just the 3.86 number for EPS. So the PE was not around 20 but around 15 at that time, as obviously it is continuously changing with the stock price.

    2- Trevis talks about "production problems" and states that "if JNJ can get back on track, there is ample room for earning improvement".

    Again it is a little bit superficial.

    At the end of the day, even with recalls, revenue is increasing ( from 65,030M in 2011 to 67,224M in 2012) and non-GAAP earnings too. (14.3 Billion with a gain of 3.4% versus the previous year).

    Additionally there is little or no emphasis on another headwind, which is temporary anyway: the negative currency effect.

    3 - JNJ spent more in R&D during 2012 versus 2011. From the above mentioned article looks like this expense has not recovered from the after crisis low of 6.8 Billion.

    This is the easiest point to counter as everybody can see the balance sheet below.

    I am enclosing here 2 pictures from the JNJ annual report (2012).(click to enlarge)Here the shares issuance and buyback related to the acquisition are showed.(click to enlarge)Here you can see how the R&D expenses are recovering from the 2010, and how they are at the 7.7B all time high.

    Conclusion:

    Actually I see JNJ stock fairly valued, but I bought it full hands time ago when negative sentiment was high, as showed on my comments on the past articles about JNJ.

    In this situation the strategy for an investor looking to take position in this stock could be only selling puts on a pull back, or selling covered calls on further stock gains. (Other than rebalancing if he or she is over or under- exposed).

    I like the 85 strike as a level to sell some calls and the 75 strike as a level to sell some puts. It is difficult to have a bias because JNJ will probably perform in line with the market in the near future.

    Anyway there are other consumer staples stocks more overvalued for those looking to short the sector like Colgate , Panera or Bristol Myers.

    May be the fact W.Buffett was selling this stock contributed to the bearish sentiment. The same happened with Procter & Gamble and this stock was also misunderstood and considered expensive, ignoring the presence of non-recurring items. The lesson is that analysis must be deeper and watching PE calculated by others can be misleading.

    Disclosure: I am long JNJ, PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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