If You Like Johnson & Johnson And Abbott Labs, Then You Should Consider Atrion Corporation

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Includes: ABT, ATRI, JNJ
by: Doug Van Cuyk
Summary

ABT and JNJ are large companies that have offered shareholders strong returns over their history. ATRI appears to have similar metrics while being a much smaller company.

This analysis will compare the three companies by looking at financial metrics, balance sheets, valuation and shareholder friendliness.

ABT and JNJ are currently dividend aristocrats and ATRI appears to be working towards that same goal.

This analysis will try to suggest ATRI offers an investor the opportunity to get into the next ABT or JNJ early in the ATRI history.

Background

Johnson & Johnson (NYSE:JNJ) is a healthcare juggernaut. JNJ has over 275 operating companies in more than 60 countries and sells products in just about every country worldwide. JNJ breaks themselves down into three main operating units: Consumer, Pharmaceutical and Medical Devices. The consumer branch includes well known products such as Tylenol, Motrin and Zyrtec. The Pharmaceutical branch includes well known products such as Stelara, for severe plaque psoriasis and psoriatic arthritis, Simponi and Remicide which are both useful in treatment of immune mediated inflammatory disease. In 2014, JNJ generated revenues of $74.3 billion and profits of $16.3 billion. As of January 30, JNJ was valued at just over $280 billion per the company's market cap.

Abbott Labs (NYSE:ABT) is another healthcare juggernaut. ABT breaks themselves into four main operating units: Established Pharmaceutical Products, Diagnostic Systems, Nutritional Products and Medical Devices. In January of 2014, ABT took a step to simplify the company by splitting a large healthcare company into two separate companies. ABT maintained the aforementioned branches and a second company AbbVie (NYSE:ABBV) took the remainder of the split, which is primarily a research pharmaceutical company. ABT breaks themselves down into four main operating categories, Nutrition, Diagnostics, Established Pharmaceuticals and Medical Devices. ABT further breaks down their Nutrition division into Pediatric and Adult nutrition. Some well known products that ABT sells include Similac, Ensure, PediaSure, Pedialyte, FreeStyle, Glucerna and AlphaTrak. ABT operates and serves customers in more than 150 countries around the world. In 2014, ABT had revenues of $20.2 billion and profits of $3.5 billion. As of January 30, ABT was valued at over $67 billion per the company's market cap.

Atrion Corporation (NASDAQ:ATRI) is a small product manufacturing company that focuses their efforts on the medical industry. ATRI breaks themselves into four main operating units: Cardiovascular Products, Fluid Deliver Products, Ophthalmic Products, and Services geared towards manufacturing, marine and aviation systems. Some products that ATRI produces include the MPS2 Myocardial Protection System and LacriCATH balloon catheter. MPS2 offers proprietary technology used to deliver fluids and medications during open heart surgery. LacriCATH products offer a surgery free treatment of blocked tear ducts and chronic tearing. Neither of these products are household names but they are critical niche products where ATRI holds market leading positions. ATRI has not reported their full year revenues and earnings for 2014 yet, so I will just take the trailing twelve months for the following metrics. ATRI had revenues of $139.9 million and profits of $27.58 million. As of January 30, ATRI was valued at $652 million per the company's market cap.

Right away an investor can pick up on the major differences between the three companies presented, which is the size of the companies. JNJ and ABT are very large companies and ATRI is a small niche company. Size can offer comfort in knowing the company is not going away overnight, but size can also limit future prospects. Investors definitely have reasons for investing in JNJ and ABT, this article will try to offer up some reasoning to consider taking a stake in ATRI by comparing the three companies.

Financial Metrics

In the financial metrics portion of this analysis, I am going to compare the three companies on the following metrics: Revenue, Revenue Growth, Profit, Profit Growth and Profit Margin. Below is a chart showing each of these metrics over the course of the last 4 years. The following numbers are presented in millions of US dollars.

ABT

2011

2012

2013

2014

CAGR

Revenue

$ 21,407.00

$ 21,494.00

$ 21,848.00

$ 20,247.00

-1.84%

Profit

$ 1,126.00

$ 579.00

$ 3,189.00

$ 3,503.00

45.98%

Profit Margin

5.3%

2.7%

14.6%

17.3%

JNJ

2011

2012

2013

2014

CAGR

Revenue

$ 65,030.00

$ 67,224.00

$ 71,312.00

$ 74,331.00

4.56%

Profit

$ 9,672.00

$ 10,853.00

$ 13,831.00

$ 16,323.00

19.06%

Profit Margin

14.9%

16.1%

19.4%

22.0%

ATRI

2011

2012

2013

2014*

CAGR

Revenue

$ 117.70

$ 119.06

$ 131.99

$ 108.07

5.9%**

Profit

$ 26.04

$ 23.63

$ 26.58

$ 21.77

1.03%**

Profit Margin

22.1%

19.8%

20.1%

20.1%

*through three quarters in 2014

**CAGR calculated from 2011 through 2013

Source: Data gathered from each company's website, chart compiled by author.

JNJ is by far the most consistent of the three companies compared above with strong revenue growth and strong comparable profit growth. ABT has seen revenue shrink while profit has exploded over the last four years. ATRI has shown strong revenue growth as well, the strongest of the three companies, but the profit growth has lagged. The main reason behind ATRI's lagging profit is related to tax benefits the company received in the past causing fluctuations in profit.

ABT's profit margin has been all over the place and recently shown strength over the last 2 years rising to 17.3% from a low of 2.7% in 2012. JNJ has seen steady rise in profit margin from a low of 14.9% in 2011 to a high of 22.0% in 2014. ATRI has seen the profit margin drop to 20.1% from 22.1% in 2011 which is directly related to the aforementioned tax benefits. ATRI had some other one time sale items that have hit the results over the course of the last four years which are better outlined in a previous article suggesting an entry point for ATRI.

JNJ appears to be the cream of the crop based on the last four years as they have shown strong revenue, profit and profit margin growth. ABT has kind of been all over the place with the company seemingly straightening things out over the last two years. ATRI appears to be operating efficiently over all four years being analyzed and from this portion belongs to the same conversation as JNJ and ABT.

Balance Sheet

The next step in this analysis will be taking a look at the balance sheet of each company. I will be taking a look at the amount of Long-Term Debt, Debt to Equity Ratio and Net Cash/Debt position. I prefer to look at these three metrics as a company that is strapped with debt will spend more time managing debt versus growing profitability in the future. Below is a chart comparing these metrics for each of the three companies.

Cash

Long Term Debt

Debt to Equity

Net Cash

% of Market Cap

ABT

$ 5,098.00

$ 3,719.00

0.3627

$ 1,379.00

2.05%

JNJ

$ 33,005.00

$ 13,152.00

0.1993

$ 19,853.00

7.08%

ATRI

$ 55.10

$ -

N/A

$ 55.10

8.45%

Source: Data gathered from each company's website, chart compiled by author.

All three companies have more cash on their balance sheet than they do debt. ATRI has perhaps the cleanest balance sheet without carrying any debt. Additionally, ATRI has the highest portion of the company's value in net cash at 8.45%, JNJ is closely behind at 7.08%. One area this does not look at is the amount of cash held overseas. As previously mentioned JNJ and ABT operate around the world which offers plenty of markets to sell their products into. This also creates a small headache as the money made overseas is often kept overseas as repatriating this money back to the US will result in additional taxes being paid on the profits. ATRI currently houses their cash in the US even though they sell to markets around the world.

All three companies have plenty of cash to fund operations and also offer the companies some additional firepower to pursue acquisitions or return additional cash to shareholders. Again, ATRI compares similarly, if not better than ABT and JNJ in this metric.

Valuation and Potential

The next area I would like to perform some comparisons is valuation. As each of these companies have a nice hoard of cash, I took the standard metrics one step further and include cash in the calculation. The chart below offers a look into the P/E ratio and PEG ratio for each of these companies.

P/E

PEG

P/E Net Cash

PEG Net Cash

ABT

19.24

0.42

18.85

0.41

JNJ

17.17

0.90

15.96

0.84

ATRI

24.54

2.19

22.47

2.04

Source: Data gathered from Google finance, chart compiled by author.

As ATRI has fluctuations in their project growth over the last four years related to tax benefits, I used 11% growth based on a previous analysis that was cited above. Based on the metrics provided above, ABT appears to be the company valued the cheapest when considering growth over the years in comparison. JNJ again appears to be fairly valued while ATRI carries a premium valuation. This is one section where ATRI carries a premium compared to ABT and JNJ. While the metrics in the chart are based on past growth rates, investors need to consider future prospects which might explain the premium price for ATRI.

From my perspective, the main reason ATRI is trading at a premium comes down to the law of large numbers. As both ABT and JNJ are huge companies, they will eventually hit a wall as they need mega products to maintain their growth rates. For ABT to double their revenue they need to generate an additional $20 billion in sales. For JNJ to double revenue they need to generate $75 billion in sales. For ATRI to double their revenue they only need to generate another $140 million in sales. When considering those numbers, I know which is the most likely. This is one of the main reasons I believe that ATRI carries a premium.

Shareholder Friendliness

One final area I would like to analyze is shareholder friendliness. Each of the companies shows they like to reward shareholders with both dividends and buybacks. Both ABT and JNJ are members of the dividend aristocrats club which is an exclusive club for companies that have raised their dividends for at least 25 years straight. ABT has an impressive streak of 42 years and has a current yield of 2.14% based on the current dividend of $0.96 annually. JNJ has an even more impressive streak of 52 years and has a current yield of 2.80% based on the current dividend of $2.80 annually. ATRI has a streak of 8 years and has a current yield of 0.90% based on the current dividend of $3.00. All three of these companies continue strong growth in the dividend metric and appear to be well positioned for strong growth going forward.

When looking into the buyback segment, all three companies are shareholder friendly in this area as well. Over the last 2 years, ABT has spent over $3 billion in share buybacks. Likewise JNJ has spent nearly $4 billion on share buybacks in that same timeframe. ATRI has spent over $21 million on stock buybacks over the same time frame. Considering company size, ABT invested 4.4% of the company value in buybacks, JNJ 1.42% and ATRI bought back 3.22%.

When adding buyback yield and dividend yield, ABT is yielding 6.5%, JNJ 4.2% and ATRI is yielding 4.12%. All of these yields are attractive for any long-term investor. ABT appears to be the most shareholder friendly company of the three, however this is better when compared over time and this is only a snapshot.

Summary

ABT, JNJ and ATRI are all companies operating in the healthcare sector. ABT and JNJ are monsters in the industry and ATRI is a small niche company. Outside of the market cap, ABT, JNJ and ATRI seem to have similar metrics outside of the valuation. ATRI is trading at a premium when compared to ABT and JNJ, which I believe is related to the size of the companies and future prospects for growth. All three companies have solid balance sheets, with significant net cash positions. Additionally, all three companies offer shareholder a strong and growing dividend with the additional appeal of share buyback. While I feel all three of these companies can be purchased at the current level, I feel ATRI offers the greatest appeal long term based on the size of each company. Due to ABT and JNJ company's size, ATRI has the greatest potential for long-term growth. Taking this one step further, I would not rule out the possibility of ABT or JNJ acquiring ATRI as ATRI could offer an appealing bolt on acquisition for either company.

Disclosure: The author is long ABT, JNJ, ATRI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This analysis offers up opinions of the author and are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.