Will This Company Be Able to Turn it Around in 2013?

Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite the rally Johnson & Johnson (NYSE: JNJ) during the second half of 2012, the company's stock has under-performed the S&P500 index. Will JNJ be able to turn it around in 2013? What are the strong points the company has? Are there any perils the company faces? Let's review the recent developments related to the company in anticipation for its annual and fourth quarter financial reports.

Fourth Quarter Report

The current expectations are that the company's revenues will rise again in the last quarter of 2012 compared to the year-ago quarter. The expectations are for an 8.7% growth in revenues in the fourth quarter.  I'm a bit skeptic about this figure. Among the three major sectors the company operates: Consumer, Pharmaceutical, and Medical Devices, the Consumer sector has declined in the first nine months of 2012 compared to the same time a year back. The other two sectors have risen during the first nine months of 2012. 

Even if the Pharmaceutical and  medical devices sectors will continue to rise in the fourth quarter, the high competition and low growth in the U.S economy is likely to keep the consumer segment from rising. Furthermore, in all three segments the fluctuations in the currencies have had an adverse effect during the year. This adverse effect could also come into play in the fourth quarter, which could curb the growth in revenues.

Nonetheless, the company's profitability has increased during the first nine months of 2012 compared to 2011 from 19% to 21.5%. This rally is mostly attributed to the growth in the company's pharmaceutical segment, which is more profitable than the consumer segment. The growth in profitability didn't occur only to JNJ, it was also related to other big pharma companies such as Eli Lilly (NYSE: LLY) and Pfizer (NYSE: PFE) : the  profitability of Eli Lilly grew from 22% in 2011 to 26.4% in 2012 (Q1-Q3);the  profitability of Pfizer rose from 19% in 2011 to 22.6% in 2012 (Q1-Q3);  

On the other hand, Johnson & Johnson, unlike other related companies, have had a decline in its R&D as a percent out of its total revenues. This figure, however, is biased downward because the total revenues include revenues from consumer products that are likely to take a small margin out of the R&D provision. When controlling the company's consumer revenues, the average R&D as percent of revenues comes to 13.7% in the first nine months of 2012, which is still lower than other pharmacy companies such as Eli Lilly and Pfizer that reached 22.2% and 16.6%, respectively.

If JNJ will continue to cut its R&D compared to its revenues, this could impede its future progress in the future. 

Company’s Risk Falling

The company has taken several steps during the year that lowered its financial risk and also shows the management’s confidence in the company’s progress. During the first nine months of 2012 the company bought back its own stock and paid for it nearly $11 billion, according to the company’s cash flow report. This buyback process was very common for many top S&P500 companies during last year. At the same time, the company paid back nearly $3 billion of its loans. This debt repayment lowered the company’s leverage. As of September 2012 the company’s debt-to-equity ratio reached nearly 0.264. This ratio was 0.344 as of December 2011. Moreover, the company was capable to pay its dividend from its free cash flow (cash flow from operating and Investing Activities). This is another indicator for the company's low liquidity risk.  

In terms of dividends, JNJ is currently paying a dividend which brings its annual yield very close to other Pharmacy companies:  the yearly dividend yield of JNJ is 3.35%, Eli Lilly is at 3.68% and Pfizer is at 3.58%.

The bottom line:  

The company's financial stability has improved during the year. The company's repayment of loans, high cash flow, steady growth, and stock buyback program puts the company at low risk. On the other hand, this company's growth might slowdown in the near future on account of its consumer segment and currency risk.

For further Reading: Will Exxon Continue To Trade Up?


Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

liorc has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus