Johnson & Johnson a Compelling Investment

Includes: JNJ, PPH, SPY
by: Mike Havrilla
Johnson & Johnson (NYSE: JNJ) 1-Year Chart vs. S&P 500 Index and Pharma HOLDRS (NYSEARCA: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.

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