Since 2010, Johnson & Johnson (NYSE:JNJ) has had to issue over 50 drug and device recalls. It was a big hit to a company that has a tremendous reputation. After all, it is a top holding of Warren Buffett’s Berkshire Hathaway (NYSE:BRK-A), who sets high standards for management teams.
But it looks like Johnson & Johnson is getting back on track. In its first-quarter report, the company beat Wall Street forecasts and boosted its guidance. The company believes that earnings will range from $4.90 to $5.00 per share for the full-year, which means the forward price-earnings ratio is 13. That’s definitely a reasonable valuation for a megabrand.
In fact, recently an analyst from Goldman Sachs (NYSE:GS), Jami Rubin, upgraded the stock to a “buy” from “neutral.” The rationale is that JNJ is “on the cusp of an accelerating earnings trajectory.”
Why? A key reason is the launch of three new drugs, which include Zytiga (just approved), telaprevir, and Xarelto. They all address large market opportunities – like cancer, Hepatitis infection and strokes – and have the potential f being billion-dollar franchises. This is in contrast to other pharma companies that have had difficulties finding new drugs to keep their top-lines robust.
But of course, J&J has a diversified platform. It’s diagnostic and medical device business is also substantial. Consider that the company recently shelled out $21.3 billion for Synthes. As a sign of its importance, J&J’s stock actually rose from $59 to $64 on the rumors of the deal. No doubt, the company has a solid track with M&A transactions.
In the case of the Synthes, it is a world-class maker of surgical devices, with a focus on orthopedic trauma. The market is growing quickly and the company sports operating margins of 35%. Synthes is the dominant leader in the market and has twice the business of its main rival Stryker (NYSE:SYK).
Of course, J&J also has a strong consumer business, which includes oral care, baby care and skin care. While these are not growth business, they still provide stable cash flows. Besides, it appears that the consumer market is starting to perk-up as the economic recovery continues.
When looking at an investment – especially for large companies – it is important to find strong catalysts. These tend to last a several years and result in a higher stock price. As for J&J, it has several important catalysts that are in the early stages. And in the meantime, the company is providing a hefty 3.5% dividend.
As of this writing, Hilary Kramer did not own a position in any of the stocks named here.
