At one point, I used this company’s products too, and still remember Johnson & Johnson’s shampoo ad promising “no more tears, no more tangles.” This is the company we are going to dissect in today's article.
J&J was founded 134 years ago by three siblings: Robert Wood Johnson, James Wood Johnson, and Edward Mead Johnson. It all started with the manufacture of the wound and cut management materials and bandages. Today, the company’s product range includes over-the-counter medications for babies, feminine hygiene products, etc. Bandages and wound dressing materials have not left the scene either.
On top of that, there’s a long list of various drugs, including anticancer medications and drugs to treat diabetes, prostate cancer, and anemia. Aside from that, the company produces medical equipment for cardiovascular, oncological and neurosurgery, traumatology and orthopedics, sports medicine, ophthalmology, endocrinology, obstetrics, and gynecology.
The company value is $391 billion, with annual turnover being $70–80 billion, and 1.39% of S&P 500 index.
Johnson & Johnson’s dramatic growth kicked off back in 1916 when it acquired a textile company and covered Canada and the UK. In 1944, J&J got listed on the New York Stock Exchange. From 1932 to 1968, the company's turnover went up from $11 million to $700 million.
What followed next was another wave of business expansion. In 1977, Extracorporeal Medical Specialties, manufacturer of dialysis systems was taken over. By 1978, Johnson & Johnson took over almost half of the feminine hygiene products market. In 1986, LifeScan, a manufacturer of glucometers was acquired, along with the German company Penaten G.m.b.H, a leader in baby and child-specific products.
In 1998, DePuy Inc. which was engaged in the manufacture of orthopedic products, including artificial joints, was purchased for $3.7 billion. In 1999, J&J took over Centocor Inc., a pharmaceutical company that develops and markets products to treat cancer, autoimmune and cardiovascular diseases for $4.9 billion. In 2006, J&J bit off a division of a well-known Pfizer company.
For some, 2008 was a crisis year but not for Johnson & Johnson that acquired Mentor, a leading manufacturer of silicone breast implants and equipment for plastic surgery.
J&J wouldn’t stop just there, and purchased Russian brands such as Doktor Mom and Rinza, which you may or may not have heard about, from Indian company JB Chemicals & Pharmaceuticals LTD.
Now, take a look at the figures. Swiss company Synthes, global leader in the production of orthopedic equipment was acquired for $19.7 billion in 2012.
What’s interesting, this is not a complete list of all acquisitions. We just mentioned the biggest ones.
That being said, just like with any business, not everything was always smooth. E.g. in the 80s, there were cases of Tylenol poisoning. Fierce competition led to someone adding potassium cyanide to the packaging. Following these incidents, the packaging was improved by being made airproof. In the 2000s, the company had to cease selling Propulsid (Cisapride) which caused about 100 deaths and hundreds of cases of cardiovascular disorders.
Since 2008, there had been numerous complaints about the poor quality of medications: the presence of odor, bacteria, and metal particles. In light of this, the FDA recalled 288 million McNeil Consumer Healthcare items.
There were also complaints about the quality of DePuy products. In November 2013, the company paid $2.5 billion to settle 7,500 lawsuits. An Oklahoma judge ordered J&J to pay over $572 million for implication in fueling the opioid-addiction crisis resulting in a growing number of deaths caused by uncontrolled use of opioid analgesics.
Another lawsuit that some may find hilarious was the Risperdal case won by a man from Maryland who proved that the use of antipsychotic drug Risperdal causes enlarged breasts. A Philadelphia jury ordered Johnson & Johnson to pay this man $8 billion in punitive damages. In 2011, the Securities and Exchange Commission charged J&J with a violation of the FCPA for bribing doctors in Greece, Romania and Poland. Looks like a pattern, doesn’t it?
As we can see, big companies with big money often ignore clean business practices which come as no surprise nowadays.
This reminds me of something Wilhelm Schwöbel once said:
“A modern business man should follow special rules of the game: lie first and praise honesty after; steal first and make generous donations after; rob first and talk about making peace after; kill first and damn the war after; do wrong first and skulk behind the laws after; violate first and forget about doing so after."
The dividend rate is 2.55% which is higher than the average market rate of 1.75%.
Profit margins are looking pretty good too:
The company is neither overindebted nor institutionally overbought (InstOwn 70.40%).
It maintains a steady top and bottom line performance. From 2015 to 2019, revenues increased from $70.2 to $82.06 billion. Net profit is stable too, being slightly above $15 billion. Accordingly, EPS figures have been about $5.5 over the last five years. At a current price of 148, P/E is 26.90.
It doesn’t look as great as we hoped. During the period from 2012 to 2015, J&J offered an excellent fair price, along with a great dividend yield.
And what do we have now? Let’s take a look at the latest quarterly reports. We can see that the company has been maintaining the area of $2 per quarter lately. This means that we can expect about $8 EPS per year. In this case, P/E expectations will drop from 26.90 to 18.5. This figure is very close to fair value.
S&P 500 is breaking its highs almost every day. Cheap money does its part. Meanwhile, the economy remains very fragile, and the risks can be incredibly high.
In light of the above, I am highly skeptical about the breakout of 148.24, since the first index turmoil may have a dramatic effect on the share. It is much more stimulating to analyze 126 at support level. P/E is already about 15–16 in this area, which is much more promising.
Can the stock plummet to 86 again? Well, since we are dealing with the market, everything is possible here. With this in mind, the investors should include any scenario in expected values, and the traders must protect themselves with relevant stop loss orders. The movement till 86 is possible in the event of the global financial crisis which is expected by many but getting delayed thanks to the efforts of the Federal Reserve System.
Аvtor: Viktor Makeev