Johnson & Johnson: Diversified and Timely
Fourth-quarter earnings reinforce the view that this diversified health care giant is on track for short-term and long-term excellence.
A table with three legs is more stable than a table with only one or two. And so it is with businesses. Johnson & Johnson's three businesses -- drugs, medical devices and consumer products -- together create a solid foundation. And when the ground becomes uneven under one of the legs, the other two can provide support. Indeed, the diversity of J&J's business is a big reason why the stock should perform well in 2007.
J&J's fourth-quarter earnings, released on January 23, underscore the point, says Morningstar analyst Heather Brilliant. Sales of $13.7 billion led to profits of $2.4 billion, or 81 cents per share (excluding charges related to J&J's recent acquisition of Pfizer's consumer-products business). The results beat the average analyst estimate of 79 cents per share. For the entire year, profits rose 11%, to $11.1 billion, or $3.76 per share (excluding various one-time gains and charges) -- helping the health care giant extend its streak of earnings increases to 23 years.
J&J's pharmaceutical division, the largest of its three businesses, has been going through a rough patch. Like other big drug makers, J&J has been hurt by intense competition from both brand-name competitors and manufacturers of generic drugs. Strong performance from drugs for schizophrenia, autoimmune disease and epilepsy boosted sales in the fourth quarter. And J&J has a robust pipeline of new drugs. Brilliant notes that J&J has 15 new drugs in late-stage development and a host of other potential drugs in the earlier stages of development. She expects the firm to apply for up to ten new-drug approvals in 2007.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A potential problem for investors is that the Democratic-controlled Congress could try to force drug makers to cut prices. Although investors should watch developments carefully, enactment of legislation that would severely harm this important industry isn't likely, especially with Republicans still in control of the White House. Further shielding J&J is, yes, its diversification. The drug division accounts for a little more than 40% of its business, and that share is likely to fall because J&J's medical-devices and consumer-products businesses experience faster growth rates. "We think the pharmaceutical division could constitute less than 30% of sales by the end of the decade," Brilliant says.
Medical devices, J&J's second-largest business, will get a boost from powerful demographic trends. An aging population and increasing wealth around the world mean more people can afford treatments with J&J-made devices. Although safety concerns have hurt sales of drug-coated stents in recent months, Brilliant expects J&J to develop innovative new stents and orthopedic devices in the future. The company's acquisition of Pfizer Consumer Healthcare, which closed in the fourth quarter and contributed names such as Listerine and Nicorette to J&J's stable, should lift sales for the consumer-products division in 2007, Brilliant says. The new brands combined with J&J's existing consumer products will generate roughly one-fourth of the company's revenues.
Despite the solid performance for the fourth quarter, the stock closed down 1% on January 23, to $66.50. The stock (symbol JNJ) sells for 16 times the average analyst earnings estimate for 2007 of $4.04 per share. That compares with a five-year average price-earnings ratio of 19, according to investment newsletter Dow Theory Forecasts. The newsletter, which believes J&J's 2007 profits will beat analyst expectations, includes the stock on its one-year "buy" list as well as its list of long-term picks. Kiplinger's agrees. For more information, see Stocks to Own in 2007.
-
How To Find the Best Japanese Stocks
Japan's stock market is soaring which has many investors wondering how to find the best Japanese stocks. We take a closer look here.
By Kyle Woodley Published
-
Can Money Buy You Happiness? Yes, It Can. However…
Having a higher income doesn't mean you also have enough of the other things that make you feel truly happy and wealthy (relationships, hobbies, time).
By Richard P. Himmer, PhD Published
-
Stock Market Today: Stocks Close Lower as Tech Shares Slump
Weakness in several Magnificent 7 stocks created headwinds for the main indexes Friday.
By Karee Venema Published
-
Stock Market Today: Stocks Swing Lower as Chipmakers Slump
The main indexes erased an early lead Thursday as several semiconductor stocks sold off.
By Karee Venema Published
-
Stock Market Today: Stocks End Mixed Ahead of Retail Sales, PPI
Stocks took a breather Wednesday as investors looked ahead to tomorrow's inflation data.
By Karee Venema Published
-
Stock Market Today: S&P 500 Nabs New Record Close After February CPI
Strong gains for Oracle and Nvidia helped the main indexes brush off hotter-than-anticipated inflation data.
By Karee Venema Published
-
Stock Market Today: Stocks Struggle Ahead of February CPI Report
The main indexes had trouble getting off the ground Monday as Wall Street waits for tomorrow's inflation update.
By Karee Venema Published
-
Stock Market Today: Stocks Go Into Reverse as Nvidia Slumps
The main indexes were initially higher after the release of the February jobs report, but ended well off their session highs.
By Karee Venema Published
-
Stock Market Today: Nasdaq Soars as Magnificent 7 Stocks Rally
A strong day for the all but one of the Magnificent 7 stocks fueled upside in the main indexes.
By Karee Venema Published
-
Stock Market Today: Stocks Rise After Powell Repeats Rate-Cut Message
The main indexes closed higher after Fed Chief Powell stuck to his script on inflation and interest rates in today's congressional testimony.
By Karee Venema Published