J&J Positioned for a Brighter Outlook
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amid product recalls and public lawsuits the medical products giant Johnson & Johnson (NYSE: JNJ) announced a leadership change with the new CEO Alex Gorsky. "Johnson & Johnson needs to rethink the way it brings drugs to market, expand its reach into global markets and rebuild consumer confidence by returning recalled brands to pharmacy shelves," he said to the New York Times in a recent interview. He outlined how the company would be adjusting its supply chain and making accommodations. Mr. Gorsky joined the company as a sales representative in 1988 and has run the pharmaceutical business for Europe, Africa, and the Middle East.
$2.2 Billion in Fraud
The company on June 11 has agreed to pay a $2.2 billion fine, including a criminal portion estimated at $600 million. This settles a lawsuit between the company and US Investigators over allegations that the company used abusive marketing tactics with its antipsychotic drug, Risperdal. This would be the second largest settlement by a pharmaceutical giant since Pfizer (NYSE: PFE) paid $2.3 billion in 2009 over improper marketing. This settlement does not include lawsuits being carried out in South Carolina, Louisiana, and Arkansas. At one point, Risperdal was the company's largest selling drug totaling $24.2 billion in sales.
Recently, the company announced the completion of the Synthes acquisition totaling $19.7 billion in cash and stock. Synthes, a multinational medical device company, is the world's largest maker of implants to mend broken bones, bio materials and surgical tools. As Johnson & Johnson transitions more toward medical devices, one would be wise to note that the company has been in the market for some time. In 2001, the company drew 34 percent of its revenue from medical devices with a 18 percent operating margin, with pharmaceuticals grabbing 46 percent with an operating margin of 33 percent. Comparatively in 2010, ten years later, medical devices gained 40 percent of revenues with pharmaceuticals garnering 36 percent with operating margin remaining flat, meaning Johnson & Johnson has grown revenues from medical devices over the last ten years before the acquisition. Now with the merger complete, the company has a 60 percent stake in the trauma care market.
Other analysts noted the deal to be odd as the company made payments in stock and cash. Some speculate with a S&P AAA rating the company opted to hold cash reserves to maintain it's perfect credit rating.
Favorability At Last
A group of analysts today increased their outlook for Johnson and Johnson raising both ratings and expressing enthusiasm. The company predicts it's acquisition of Synthes will increase 2012 earnings by 3 to 5 cents per share, and in 2013, 10 to 15 cents per share.
Last week, the stock's volatility was at 1.69 percent with $65 billion in revenue generated in the previous 12 months, and income of $10.11 billion. Profit margins were at 15.55 percent with operating margins as a whole at 19.84 percent, with sales up 4.05 percent.
For the past 12 months, JNJ's price to sales ratio was 2.72 and price to cash ratio at 5.23. Comparatively, Pfizer is at a P/S of 2.51 percent and P/C 6.93 percent, Merck & CO (NYSE: MRK) at P/S 2.42 percent and P/C 7.5 percent, Bristol Myers Squibb CO. (NYSE: BMY) at P/S 2.69 percent and P/C 11.49 percent, and Abbott Laboratories (NYSE: ABT) at P/S 2.46 percent and P/C 10.16 percent.
Analysis, Buy, Sell, Hold
While the company has faced a backlash of negative criticism and hostility over unfavorable business practices resulting in legal ramifications, the company remains on track to reposition itself as a top performing stock based on earnings and positive outlooks.
A diversified program with a large drug line, a newly acquired presence in medical devices and consumer aimed products, will continue to serve the company well for the next few years. According to Standard & Poor's, the company is positioned to do well with the Xarelto blood thinner, Incivo treatment for Hepatitis C, Zytiga for Prostate cancer, and Edurant for HIV.
Other positive outlooks include an eventual stock buyback and the synergies developed by the Synthes merger. With sales to stock price being ahead of competitors, the company looks positioned to move forward in the years ahead.
muhammadbazil owns shares of Abbott Laboratories. The Motley Fool owns shares of Abbott Laboratories and Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson and Pfizer. 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.If you have questions about this post or the Fool’s blog network, click here for information.