With Johnson & Johnson (NYSE:JNJ) facing not one, but two huge legal threats that could cripple the company, shorting JNJ stock now seems like a good idea.
Moreover, despite these two huge threats, the valuation of JNJ stock remains fairly elevated. Specifically, its trailing price-to-earnings ratio of 21 is almost exactly in line with the market average.
Talcum Powder Lawsuits Could Derail Johnson & Johnson
“In 2018, a jury awarded a nearly $4.7 billion verdict to 22 women and their families who claimed that asbestos in JNJ’s talcum powder had contributed to their ovarian cancer,” I wrote in July. “The company is appealing the lawsuit.”
JNJ is now facing 14,000 “similar cases,” medtruth reported earlier this month. The publication added that a single federal judge could dismiss all but 2,000 of those lawsuits. Still, if the 2,000 remaining plaintiffs win an average of $50 million, that’s a total of $100 billion, and probably too much for J&J to afford. Additionally, the judge’s verdict could be appealed.
Opioid Lawsuits Could Hurt JNJ, Too
On Monday, a judge ordered J&J to pay Oklahoma $572 million after finding that the company had used deceptive marketing practices to push its opioids. Johnson & Johnson says it will appeal the verdict. The company is one of the defendants in a class-action federal lawsuit that involves about 2,000 plaintiffs. Separately, dozens of states have filed lawsuits against companies involved with selling opioid drugs. Presumably, J&J is a defendant in at least some of those lawsuits.
The Oklahoma verdict will have a negative impact on J&J’s ability to defend itself outside of the state, although it doesn’t mean that the other cases have become a slam dunk, Stanford University Law professor Nora Freeman Engstrom told USA Today.
With a population of around 4 million, Oklahoma is definitely not a large state, yet it was awarded (pending appeal) nearly $600 million from J&J. With Johnson & Johnson facing lawsuits from hundreds of other plaintiffs at the federal level — and likely from multiple larger states — the company could easily wind up being forced to pay $75 billion.
Johnson & Johnson Doesn’t Appear to Have Tons of Money
Some pundits and journalists have pointed to the company’s huge profits as evidence of its invincibility. But at the end of the second quarter, the company only listed $15.3 billion of cash on its balance sheet. And it listed over $30 billion of debt.
Let’s say the company has to pay, in total, $150 billion as a result of the talcum and opioid suits. Let’s also assume that insurance pays half of that total, leaving the company with a total liability of $75 billion. Its total net debt would be about $90 billion, assuming its debt and cash levels remain constant before its total legal liabilities are determined. That would probably be too much for it to handle without at least selling more shares of stock, considering that the total market cap of JNJ is about $340 billion. Moreover, the negative publicity could hurt the company with consumers, Medicare and the U.S. Food and Drug Administration, potentially denting its quarterly financial results.
The Bottom Line on JNJ Stock
Despite the fact that JNJ is facing massive potential liabilities on two fronts, JNJ stock is trading as though nothing is wrong. Unless JNJ miraculously finds a cure for an extremely widespread, debilitating disease, JNJ stock will not climb meaningfully for at least a year.
If, however, more court cases start to go against JNJ, and the credit-rating agencies warn that its balance sheet doesn’t look so good, JNJ stock will start to rapidly fall and it will have to cut its dividend. I would put the chances of that scenario happening at about 65%. And I think there’s about a 20% chance that it will go bankrupt and a 50% chance that it will have to issue many more shares of JNJ stock.
When it comes to shorting stocks, the risk/reward ratio doesn’t doesn’t get much better than the one that Johnson & Johnson is currently presenting.
As of this writing, Larry Ramer did not own shares of any of the aforementioned securities.
