by Tom Taulli | April 18, 2012 11:33 am
For the most part, Johnson & Johnson‘s (NYSE:JNJ) recent quarter, reported Tuesday, was a mixed bag. While JNJ’s earnings rose by 12% to $3.9 billion ($1.41 per share) and beat analyst expectations, the company’s revenues were down about 0.2% to $16.14 billion thanks to a 5.1% decline in the U.S. (though foreign markets saw sales gain 4.1%).
Johnson & Johnson stock hardly budged on the news, and overall hasn’t participated in the markets’ rally this year. JNJ shares are down 1.5% against a nearly 10% gain for the S&P 500.
So should you buy Johnson & Johnson stock? To decide, let’s take a look at the pros and cons:
Broad Platform: Johnson & Johnson is a unique operator in the health care industry in that it has three core businesses. It has a pharmaceutical segment, which has high-margin drugs for categories like oncology, pain management and immunology; and it also has a business for medical devices and diagnostics.
However, JNJ also has a fairly stable consumer business, which includes products for skin care, oral care, over-the-counter products and baby care.
Acquisitions: JNJ has a proven history of dealmaking. One of the most promising deals was last year’s $21.3 billion buyout of Synthes, which develops surgical devices for the orthopedics market. It is seeing tremendous growth and should be a nice driver for J&J.
Hefty Dividend: At an attractive yield of 3.6%, Johnson and Johnson is one of the top dividend stocks in the Dow Jones Industrial Average. J&J generates substantial cash flows and even has a AAA credit rating.
Economy: True, the economy is showing improvement. But unemployment still is fairly high and consumers remain frugal. This has put pressure on J&J’s consumer business as shoppers look for cheaper products.
Quality Issues: Quality control has been an enormous problem for J&J. During the past few years, the company has seen a variety of recalls of its products, such as for Motrin, Benadryl and infant Tylenol. These have tarnished the brand and increased costs. However, new CEO Alex Gorsky, a retired Army Ranger, could help on that front.
Regulatory Risk: While J&J’s drug pipeline is strong, you can’t count out the FDA’s ability to be tough on the approval of new drugs — and J&J’s history of recalls could draw more scrutiny on the front end.
Several pharma companies, such as Pfizer (NYSE:PFE) and Merck (NYSE:MRK), are facing “patent cliffs” — when a drug loses its patent protection and generic drug makers start to offer cheaper alternatives.
While this also is an issue for J&J, the company does have a strong pipeline of drugs, thanks in part to acquisitions. However, the deals’ positive impact on revenues likely won’t be felt until a year or more from now.
For investors, buying JNJ really is a longer-term proposition — and in the meantime, there’s a nice, juicy dividend to tide you over. Plus, it’s always good for confidence when a stock is backed by Berkshire Hathaway‘s (NYSE:BRK.A, NYSE:BRK.B) Warren Buffett.
So should you buy Johnson & Johnson? Yes — for now, its pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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