Both revenue and earnings continue to grow for this leading maker of prescription drugs and consumer products. But still, there are risks.
JOHNSON & JOHNSON (symbol JNJ on New York; www.jnj.com) operates through three major businesses:
Pharmaceutical (47% of revenue) makes anti-infective, antipsychotic, contraceptive, dermatological and gastrointestinal drugs;
Medical devices and diagnostics (35%) sells equipment for joint reconstruction and managing circulatory diseases;
Consumer (18%) makes over-the-counter products such as Johnson’s baby care items, Band-Aid bandages, Tylenol and Motrin painkillers, Listerine mouthwash and Neutrogena skin cream.
Partly due to acquisitions, the company’s revenue rose 3.4%, from $67.2 billion in 2012 to $71.3 billion in 2013. Revenue again rose in 2014, to $74.3 billion before falling to $70.1 billion in 2015.
In June 2016, Johnson & Johnson agreed to acquire beauty-products firm Vogue International for $3.3 billion; it represents the company’s biggest acquisition in four years. Vogue’s annual revenue—from hair and personal-care brands such as OGX, Proganix and Maui Moisture—is about $300 million.
Instead of relying on traditional advertising, Vogue has successfully used colourful packaging to help its products stand out on store shelves and to drive sales. Its product line complements Johnson & Johnson’s personal-care brands such as Clean & Clear and Neutrogena.
The new operations helped increase the company’s 2016 revenue by 2.6%, to $71.9 billion.
Johnson & Johnson’s earnings per share rose from $5.10 in 2012 to $5.70 in 2014. Earnings then dropped to $5.48 a share in 2015 before rebounding to $5.93 in 2016.
The company continues to develop new treatments. In 2016, it spent $9.1 billion (or 12.7% of its total revenue) on research, up 0.5% from $9.0 billion (or 12.9%) in 2015.
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Growth stocks: $30 billion Swiss acquisition to be completed in second quarter
Johnson & Johnson’s balance sheet is strong: its long-term debt of $22.4 billion (as of December 31, 2016) is just 6.6% of its market cap. It also held cash of $41.9 billion, or $15.52 a share.
In January 2017, Johnson & Johnson agreed to acquire Actelion, a Swiss biotech company best known for its drug therapies to treat high blood pressure.
The company will pay $30 billion in cash for that firm. As part of the agreement, Actelion will spin off its research & development business as a separate company to trade on the Swiss exchange. Johnson & Johnson will initially own 16% of the new firm. It has the option of buying an additional 16% stake at some time in the future.
The company expects to complete the Actelion purchase in the second quarter of 2017. The new operations should add $0.35 to $0.40 a share to Johnson & Johnson’s earnings in the first full year.
In the near term, the strong U.S. dollar will continue to hold back the company’s revenue. As well, it gets the majority of its sales from its pharmaceutical division—and that adds risk.
We’ve always felt that many investors underestimate the risk of drug stocks, and overestimate their potential. They also overlook the huge costs drugmakers face in creating a new product and gaining regulatory approval for it. Investors are just as likely to overlook the limited time that drugmakers have to recoup their investments before a drug’s patent expires or something better comes along.
Moreover, big acquisitions such as Actelion may come with hidden problems that can delay the expected benefits.
Still, the long-term outlook for Johnson & Johnson is positive. Excluding Actelion, the company will probably earn $7.00 a share in 2017. The stock trades at 17.8 times that estimate. The $3.20 dividend yields 2.6%. Johnson & Johnson has increased its payout annually for the past 54 years.
TSI Network recommendation: Johnson & Johnson is okay to hold.
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