Should You Buy Johnson & Johnson?

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

It has been a tough decade for Johnson & Johnson (NYSE: JNJ). The giant 'all-things-medical' company has undergone a serious chain of mistakes and mishaps over this past decade. It is no wonder why the company's share price has gone practically nowhere for quite a few years.

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Now, heading towards 2013, it is left for us to decide whether this situation presents an excellent buying opportunity, or whether the company has turned into a classic 'value trap'. 

A lost decade

J&J has suffered a few very troubling issues as of late:

  1. Recalls over recalls: The company has gone through some extensive drug recalls over the past few years. You can view the full list here. In fact, the practice of drug recalls has become such a routine habit for J&J that its once-iconic name for brand and quality has been directly affected by it.

    A few recent recalls that received an inordinate amount of attention from the media involved its surgical stapler devices. In the case at hand, the company was forced to recall more than 157,000 surgical stapler devices and accessories used in hemorrhoid treatment procedures, due to potential malfunctions that pose a serious safety risk.

    The stapler case was obviously not the company's first hiccup in safety management. It was preceeded by the famous Tylenol recall. In this later case, the company was forced to recall 574,000 bottles of grape-flavored liquid Tylenol for children younger than 2 -- again, due to a lack of sufficient safety management. This later case, in specific, led to some harsh comments against the company because Tylenol is mainly used for infants. A very touchy subject, indeed.

    It is imperative to understand that any company, even J&J, can quickly lose its iconic brand time after a series of missteps such as the ones described above.

  2. Changes in management: The legendary Mr. Bill Weldon, the company's CEO during this past decade was replaced by Mr. Alex Gorsky. For such a conservative company, a change in management is a true shake-up.

  3. Overly rich valuation: The company is not cheap by the numbers, compared to its industry peers. We will compare J&J to Covidien (NYSE: COV), Novartis (NYSE: NVS) and Pfizer (NYSE: PFE)
<table> <tbody> <tr> <td> </td> <td><strong>Market Cap</strong></td> <td><strong>Price/Earnings</strong></td> <td><strong>Price/Sales</strong></td> <td><strong>Gross Margin</strong></td> </tr> <tr> <td> <strong>JNJ</strong></td> <td> 196.59B</td> <td> 23.24</td> <td> 2.98</td> <td> 68%</td> </tr> <tr> <td> <strong>COV</strong></td> <td> 27.36B</td> <td> 14.72</td> <td> 2.31</td> <td> 58%</td> </tr> <tr> <td> <strong>NVS</strong></td> <td> 153.67B</td> <td> 17.91</td> <td> 2.67</td> <td> 69%</td> </tr> <tr> <td> <strong>PFE</strong></td> <td> 186.68B</td> <td> 19.86</td> <td> 3.00</td> <td> 80%</td> </tr> </tbody> </table>

Judging by the numbers, J&J is pretty expensive compared to its peers, both in terms of P/E and P/S.

J&J's lost decade did not go unnoticed. Lately, Warren Buffett's holding company, Berkshire Hathaway (NYSE: BRK-A) has sold 95% of its position in J&J. Berkshire, a long-term patient shareholder of the health-care giant, apparently decided that it'd had enough with J&J, and that its capital could be put to better use elsewhere.

The proponents
Not everyone predicts doom and gloom for the company. In fact, analysts have suddenly turned bullish on J&J. According to a recent article by Barrons, the company may be set "to deliver mid single-digit revenue growth and high single-digit profit growth in the next few years, led by its pharmaceutical division".

It is especially worth taking note of what I call a "variant perception." On the one hand, a bunch of analysts suddenly recommend a company together, and on the other hand, a veteran shareholder dumps shares of this very same company. This strong contrast usually spells a warning.

The Fool looks ahead
In my opinion, J&J is not a value bargain. It has a broken track record, expensive valuation, and a long-term shareholder who's just abandoned ship. I believe that J&J's famous slogan, "Caring for the world, one person at a time," will not apply to its shareholders.

shmulikarpf has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Covidien Ltd. and 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!

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