JOHNSON & JOHNSON (JNJ)

The company's broad-spectrum, diverse business mix of consumer health care, pharmaceuticals, and medical devices decreases the risk of investment.

1. People in industrialized countries are getting older and sicker. JNJ will provide products to make them feel better. 2. The international community will improve its health-care as world GDP equalizes. That means more Chinese demand for things like Listerine. Non-essential health will grow. JNJ’s international presence means it will win out here. 3. Trust and experience matter. JNJ is established and has a good reputation. People are very sensitive about their health 4. JNJ’s large size makes it ideally suited to capture benefits from economies of scale in the drug industry.

The current price of $58.84 does not adequately consider future demand and earnings. It is based on a short term view of the market, which is ill advised because JNJ will be in it for the long run whether or not the US collapses.

Johnson & Johnson is, perhaps, the most consistent long term performing publicly traded stock. Current dividend yield of over 3% is attractive. The company significantly participates in the pharmaceutical, medical device and consumer products industries. Many of the products offered by JNJ are virtually recession proof. JNJ has lots of cash and the stock is currently fairly priced, trading at a P/E of under 13 - the very bottom of its long term P/E range. Don’t expect to make a killing on this stock, but do expect price stability and a decent dividend – an S&P 500 beating combination in the current market.

Pharmas of the Dow. Verbatim from http://www.bapcha.com/?p=173

The three pharmas in the DJIA are Merck (MRK), Pfizer (PFE) and Johnson & Johnson (JNJ). The three have much in common. For starters, they are the “evil” drug companies that politicians love to talk about (while pandering to their constituents); and the target of trial lawyers who try to bilk them for “easy money”. Merck’s response to the Vioxx lawsuits was fantastic…. They emphasized the fact that “there is/will be NO easy money to be made on Vioxx, and we (Merck) will fight every lawsuit”. Needless to say, PPC rates at Google dropped from $20 per click for Vioxx to less than 50c in a week! Merck recently backed off this stance and has agreed to negotiate a settlement.

Getting back to the issue at hand - MRK, PFE and JNJ. JNJ derives 40% of its sales and 48% of its bottom-line from Pharma. 36% from devices and diagnostics, and 24% of revenues (16% of profits) from consumer. Their international business was 47% of sales. PFE derives 52% of its sales through its international division, and Merck, 37%. All three are down-sizing their work-force to reduce costs, and Pfizer in particular is still digesting its two huge purchases of Warner Lambert and Pharmacia.

Notable facts/numbers:

1. MRK and JNJ easily earn and pay for their dividend. PFE too easily earns their dividend, but has had to borrow money in the US - while being unwilling to repatriate money to the US from its international operations as they (Pfizer) are likely to lose as much as 20c per dollar on the repatriated dollars.

2. All three suffer a weak pipeline of drugs and while JNJ and PFE have historically been more aggressive and have acquired large companies, Merck is a lot more conservative [but for their 1993 buy-out and 2003 spin-off of Medco, the world's largest PBM].

3. JNJ and MRK have operating margins of about 33% and net margins of over 20%. PFE has operating margins of 47%, and net margins in excess of 30%.

4. JNJ sports the highest growth rate (high single digits), highest PE (low teens) and lowest yield (2.5%) among the three, and has the distinction of being part of Berkshire Hathaway’s portfolio. Merck is somewhere in the middle as they have addressed most of their liability issues with Vioxx. PFE sports the lowest PE and highest yield - due to the fact that they still sell Celebrex [albeit in a black box], and sold Bextra till 2005. In other words, PFE has a huge unaddressed potential liability, or they are the smarter than Merck [if they do not have to pay out anything for their two COX-2 inhibitors].

5. JNJ has a consumer division, but it contributes to only 16% of profits [brands include Aveeno and Neutrogena]. Pfizer recently divested their consumer division, and Merck’s consumer/OTC division is a j.v. with JNJ.

6. MRK spends 20% of their revenues on R&D. PFE spends about 17%, and JNJ, 13%.

7. JNJ is owed money by Boston Scientific [and possibly by others] in the stent wars. PFE and MRK will eventually buckle down and pay up a lot of money for manufacturing COX-2 inhibitors [NSAIDS].

Conclusions:

1. JNJ is the best stock of the bunch - with the highest sustainable growth rate and a modest yield, plus the company aggressively buys back its shares.

2. MRK is my #2 pick - with a lower growth rate, and having addressed most if not all of their liabilities. Plus the company has in the last decade, retired almost 10% of its shares.

3. PFE is my #3 pick. While the yield is easily earned, they are in a tight spot when it comes to repatriating $$$ from their foreign operations to pay the dividend [and they have temporarily stopped stock repurchases due to this fact].

Disclosures: Long all three stocks.

Bapcha Copied verbatim from http://www.bapcha.com/?p=173

JNJ has been paying dividends since 1944. According to the companies website, the dividend has also been raised each and every year since 1972 (http://www.investor.jnj.com/DivHistory.cfm). Even while paying out this increasing dividend, the company has managed to grow its business and earnings.

Demand for the diversified set of products in J&J portfolio will only increase as the baby Boomer population ages. Drugs, medical devices, medical supplies and over the counter medicines will all be used in higher volumes driving even higher profits.

JNJ is basically only involved in markets which are needed in good and bad times (economically) and the more people will have access in the US and around the globe to those products, the better the company will do. However this is not a shortterm investment.

Johnson & Johnson owns highly successful brands such as Tylenol, Band-Aid, and Neutrogena. The acquisition of Pfizer Consumer Healthcare in 2006 and addition of brands such as Listerine, Lubriderm, Visine, and Neosporin further solidifies Johnson & Johnson lead in consumer health care.

The company's broad-spectrum, diverse business mix of consumer health care, pharmaceuticals, and medical devices decreases the risk of investment.

Johnson & Johnson owns highly successful brands such as Tylenol, Band-Aid, and Neutrogena. The acquisition of Pfizer Consumer Healthcare in 2006 and addition of brands such as Listerine, Lubriderm, Visine, and Neosporin further solidifies Johnson & Johnson lead in consumer health care.

A promising array of new pharmaceutical products may make up for drops in sales of old products due to patent expirations. Johnson & Johnson has a solid product pipeline, and plans to file or secure approval of 10 to 13 new drugs in 2007.

There is a story floating around of how Tweedy & Browne, the value investment firm, were interested in Wells Fargo and had assigned an analyst to go out there and do research. Then word got out that Warren Buffett's Berkshire Hathaway had taken a position in the bank. Tweedy & Browne called back their analyst and simply bought the stock. They figured their analyst probably wasn't going to do a better job than Buffett. It's much the same here for me with JNJ. Berkshire has doubled their position in the stock. S&P have a 4-star buy rating on the stock. Morningstar have a 5-star strong buy rating on it. Value Line have it in 2 of their 3 model portfolios.

Their operating history is stellar. You can almost bank on increased dividends, whatever the short-term drag from anemia drugs or heart stents. They are broadly diversified, more so with the addition of Pfizer's consumer products unit. And nearly 50% (and growing) of their revenues come from overseas so there's some protection against the US dollar.

Finally, it's another "running downhill" situation with the US demographics potential. The boomers are set to retire and you want to get in front a little. Yes, healthcare reform is coming sooner or later and no, I don't know what that's going to look like but it's a good bet that Johnson & Johnson will do alright in any case. ^[1]

1. ↑ http://www.enlightened-american.com/wealth/research/jnj.html