- JNJ has made a number of key acquisitions over the last year.
- Moving into health care is an appropriate move as we enter the last part of this expansion.
- JNJ posted solid topline numbers last year.
Johnson & Johnson (NYSE:JNJ) is the largest major drug manufacturer, with a market cap of $355 billion. It is also expensive: out of 28 major drug companies, it has the 9th highest PE (23.91) and 5th highest forward PE (15.91). It also has the 9th highest dividend yield which is currently 2.61%. According to dividend.com, JNJ has raised its dividend 55 consecutive years.
I recently noted that because we're closer to the end of this expansion than the beginning, we should start to take a more defensive posture regarding new acquisitions (please see "Thoughts on Asset Allocation For March 2018" and "The Health Care Sector is Gaining Traction"). JNJ falls into this category for several reasons.
- It's one of the largest most iconic brands in the world. Right now, size = a higher degree of safety and lower volatility (the stock has a beta of .75)
- They have a diverse revenue stream. The company has three divisions:
- Consumer goods, which accounts for 13% of their revenue
- Pharmaceutical goods (which is further divided into six segments), which accounts for 58% of their revenue
- Medical Devices, which accounts for 28% of their revenue (they have a very diverse group of product).
- They have a global presence: They derive 52% of their sales from the US, 22% from the EU, 8% from Western Hemisphere non-US, and 17% from Asia/Africa.
- The company is currently restructuring their devices division, which will cost approximately $2-$2.4 billion now but will increase their bottom line.
- The company has made a number of key acquisitions, which they outline in their latest 10K [emphasis added]:
Actelion Ltd., an established leading franchise of differentiated, innovative products for pulmonary arterial hypertension;
Abbott Medical Optics (AMO), a wholly-owned subsidiary of Abbott Laboratories, which include ophthalmic products related to cataract surgery, laser refractive surgery and consumer eye health;
Neuravi Limited, a privately-held medical device company that develops and markets medical devices for neurointerventional therapy;
TearScience Inc., a manufacturer of products dedicated to treating meibomian gland dysfunction;
Sightbox, Inc., a privately-held company that develops a subscription vision care service that connects consumers with eye care professionals and a supply of contact lenses;
Torax Medical, Inc., a privately-held medical device company that manufactures and markets the LINX™ Reflux Management System for the surgical treatment of gastroesophageal reflux disease, and
Megadyne Medical Products, Inc., a privately-held medical device company that develops, manufactures and markets electrosurgical tools.
Let's turn to the relevant information from their income statement:
They had a nice increase in gross revenue last year. However, all their margins dropped. In the last column, I've calculated the respective standard deviations of their margins; all are very low, indicating this year is simply an off year caused by all their acquisition activity and medical devices division restructuring. There's been a modest decline in the A/R receivables turnover ratio, which has led to an increase in the number of days of outstanding receivables (more on this in a minute). However, there has been a large decline in their respective days of inventory on hand, which leads me to believe the A/R uptick was caused by last year's non-core activity. They've tightened their payables outstanding ratio, which isn't a cause for concern. Finally, they usually have a very low dividend payout ratio, which, again, was thrown off by last year's acquisitions and restructuring activity.
Because of the movement in their A/R and inventory numbers, we should also look at their balance sheet to see if something is amiss:
Neither their assets nor receivables have sharply increased as a percentage of assets. However, note the far right column. Last year, the company registered a large increase in their goodwill. If there is an asset I dislike more than goodwill, I don't know what it is. So, I stripped it out and recalculated the AR/inventory asset ratios. Even without goodwill, these ratios didn't meaningfully increase.
And that brings us to JNJ's chart:
The stock recently sold-off. It's now at the 38.2% Fibonacci level derived from its yearly highs and yearly lows. However, the stock may be forming a double bottom. And its momentum is rising.
As we enter the later stages of this bull market, we should begin to shift assets to more conservative areas like health care and consumer staples. JNJ - which is obviously a member of the former - is one of the largest and most important companies in the world. It is at attractive technical levels after its most recent sell-off.
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Analyst’s Disclosure: I am/we are long JNJ. 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.
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