Johnson & Johnson: Down But Not Out

Shares of this diversified health care company have stumbled, but some analysts say long-term investors needn't worry.

The share price of Johnson Johnson (symbol JNJ) has fallen more than 15% from its 52-week high, reached last April. This week's news hasn't helped matters: A disappointing fourth-quarter sales report on Tuesday was followed Wednesday with word that the company had lost its battle with Boston Scientific to acquire medical-device maker Guidant.

Analysts acknowledge that the company faces some near-term challenges, but some, including SG Cowen's Sara Michelmore, say that its beaten-down shares could be appealing, especially for long-term investors. At $59, the stock trades at 16 times the $3.68 per share that analysts estimate JJ will earn in 2006, according to Thomson First Call.

Citigroup analyst Matthew Dodds notes that JJ's fourth-quarter sales were below plan across the board. JJ operations are divided into three divisions -- drugs, consumer products, and medical devices and diagnostics. And "all three divisions looked wobbly," he says. But he doesn't think that the health care giant's problems are catastrophic.

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JJ's "financial performance should still improve as we move through 2006," he says. In particular, he says that the company's large pharmaceutical segment -- which has been going through a rough patch -- should start to enjoy solid sales the second half of this year, helped by growth in existing drugs as well as promising products now in its pipeline.

Despite lower-than-expected sales, JJ still met earnings expectations of 73 cents per share in the fourth quarter.

The purchase of Guidant would have allowed JJ to further build up its medical-device business, which makes drug-eluding stents, among other products. But the bidding war with Boston Scientific had pushed up Guidant's price, and Standard Poor's analyst Robert Gold figures JJ was smart to bow out when it did. With the deal no longer on the table, he says, JJ will likely look for another acquisition to drive growth. He sees growth in the medical-device division as critical to JJ's prospects, and continues to recommend the stock.

JJ has increased its dividend consistently for more than 40 years. The stock yields 2.2%.

--Lisa Dixon