A Strong Pick For Long-Term Investors
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Johnson & Johnson (NYSE: JNJ) is a US-based company offering a line of pharmaceutical products, consumer packaged goods and medical devices. Founded in 1886 as a small company, JNJ has grown into a multinational firm operating from more than 250 companies in 60 countries. Around 118,000 people are currently working in Johnson and Johnson.
JNJ always appears in the list of America’s most respected companies. It has a market capitalization of $174 billion as on January 2012. The 2011 annual report of this company shows that its gross profit amounts to $45 billion. As compared to previous year’s gross earnings, the company earned around $2,000 million more this year. This reduction in net earnings is due to the company’s restructuring, research and development initiatives.
JNJ offers dividend reinvestment program to its registered shareholders that allows them to reinvest all or a portion of their dividend into additional shares of common shares without paying any fee or commission.
Given JNJ’s history, its consistent growth in earnings per share and dividends, I think its stock is undervalued at its current price of around $64. What is interesting about the company is that its adjusted earnings have steadily increased for 28 consecutive years and dividend for 49 consecutive years. JNJ has a firm place in the list of dividend aristocrats. Its competitor Abbott Laboratories has increased its dividends for 39 consecutive years. Another competitor Novartis has increased its dividend for 14 consecutive years.
Investors may have concerns about the recent string of recalls that have tarnished the company’s reputation. Hence, the stocks are currently trading at a lower-than-average valuation. However, Johnson &Johnson makes thousands of products, including baby shampoos, band aids and cardiac stents. With such a diversity of products and operating companies, I guess its overall business will not suffer significantly. Over the last decade, JNJ stock generated a 3.6% total return for investors.
In my opinion, JNJ will be able to rebound in the next few years for various reasons. The cost of wound care is increasing and efforts are being made to prevent wounds and to detect and treat them earlier. The global market for wound care products is expected to rise to $8 billion this year. Research reports say that JNJ will be one of the companies that will be benefited from this.
Ortho Clinical Diagnostics, a part of the JNJ family has recently announced the availability of Avioq HLTV-I/II Microelisa system assay to screen blood and organ donations for antibodies. FDA requires screening for antibodies for around $16 billion donations collected in the U.S every year. If left undiagnosed, HLTV may cause leukemia and neurological diseases. In this situation, I expect Avioq HLTV-I/II Microelisa System assay will surely be a hit.
JNJ has gained European Union approval to purchase Synthes recently. The aim of this acquisition is to occupy a firm position in the market for devices that treat trauma victims. The process will be completed by 2012. I guess this deal is more important for the company, as 40% of its turnover is from medical devices and diagnostics. Johnson &Johnson will gain a majority in the trauma market with this acquisition. Together with Synthes, it will be able to compete with Pfizer (NYSE: PFE), which is biggest seller of health care products in the world.
JNJ’s Zytiga has been approved by the U.S FDA for oral treatment of prostate cancer. Androgen is a hormone that boosts the development and maintenance of male sex characteristics, but it can speed up tumor growth in men with prostate cancer. Zytiga is an androgen biosynthesis inhibitor that works by restraining the CYP17 enzyme complex that encourages androgen production. I think the FDA approval will give a boost to JNJ.
Pharmaceutical products have an estimated market of $850 billion. It is expected to grow to more than $1 trillion by 2015. I expect this trend will benefit JNJ, which derives a major portion of its revenue from the pharmaceutical line. The company is set to develop and deliver differentiated medicines. In recent years, it has expanded its portfolio in vaccine and enhanced its expertise in oncology and immunology.
Despite the troubles with recalls, JNJ’s reputation seems to be unaffected. This is evident from the recognitions and awards it has received. JNJ was listed in World’s Most Admired Companies in 2012 by Fortune Magazine. It was named one of 10 best corporations in the US for veteran owned businesses for 2012 by the National Veteran owned Business Association.
JNJ escaped from being included in the lawsuits filed by Community Catalyst in March 2012. The organization filed suits against its competitors like Pfizer and Merck (NYSE: MRK), alleging that these companies issue coupons that allow consumers to buy premium drugs for pennies on the dollar, almost at the cost of generic substitutes.
JNJ managed to grow its revenue by 4%, as compared to the same quarter last year. I expect the acquisition of Synthes and growth strategy in the pharmaceutical line will help the company increase its earnings by around 2% this year. Though its competitor Pfizer is in a stronger position, it does not have the same revenue access. Its earnings drop to 3.5%. Pfizer also lacks in earnings growth estimates as compared to JNJ. Moreover, it has a lawsuit pending from Community Catalyst. Hence, I believe JNJ’s income will grow steadily over the next five years.
JNJ’s operational sales were up 4%. Though there was a fall of 3.4% in the company’s domestic sales, its international sales increased by more than 10% in this quarter. For the financial year 2012, the company expects earnings of $5.05 to $5.15 earnings per share.
There are certain potentially profitable drugs in the pipeline. I believe that drugs like Xarelto and Simponi will be a huge success in future. Given all this, I think JNJ stock is a solid investment.
BobbyFisher has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.