Mon Apr 21 2014
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Johnson & Johnson: The Right Treatment

Johnson & Johnson (NYSE: JNJ) is one of America’s most established companies. It traces its roots back 128 years, to 1886, when it was founded by three brothers: Robert Wood Johnson, James Wood Johnson and Edward Mead Johnson, in New Brunswick, New Jersey.

Then, as now, it relied on a steady stream of innovative treatments to drive its growth.

In 1888, the company developed the first commercial first aid kit, which was initially designed for railroad workers. That year, it also published Modern Methods of Antiseptic Wound Treatment, which contained information on making surgery more sterile.

Other innovations followed, such as maternity kits aimed at making childbirth safer (1884) and Band-Aid bandages (1920).

Establishing a Global Reach

Johnson & Johnson began trading publicly in 1944 and has gone on to become one of the world’s largest companies, boasting a market cap of nearly $ 280 billion and 128,300 employees worldwide.

International markets accounted for 55% of Johnson & Johnson’s sales in the first quarter of 2014, while the U.S. supplied the other 45%.

The company operates through three segments:

  • Pharmaceutical (41% of total sales) makes treatments in a variety of areas, including cardiovascular and metabolism, immunology, infectious diseases and oncology;
  • Medical Devices and Diagnostics (39% of sales) makes a range of products that are mainly used by health care professionals in fields including neurovascular, surgery, vision care, diabetes care and aesthetics;
  • Consumer (20%) produces the personal care and over-the-counter products that Johnson & Johnson is perhaps best known for. In addition to Johnson’s baby shampoo and Band-Aid bandages, its brands include Neutrogena (moisturizer), Listerine (mouthwash) and Tylenol.

Tapping Into Long-Term Health Trends

In the latest quarter, Johnson & Johnson devoted $ 1.83 billion, or about 10.1% of its sales, to research and development, compared to $ 1.78 billion, or 10.2% of sales, a year ago.

For Investing Daily Editorial Director John Persinos, that high, steady R&D spending is a big part of Johnson & Johnson’s investment appeal, particularly at a time when the global health care market is forecastto grow at a compound annualized rate of 4.8% until 2022.

“This R&D [spending] will continue to position the company to benefit from rising rates of chronic disease around the world,” wrote Persinos in a December 6, 2013, article in our Personal Finance newsletter. “In late November, the U.S. Food and Drug Administration approved Johnson & Johnson’s new drug treatment for chronic hepatitis C infections, which pose a deadly threat to the human liver.”

More than 3 million people in the U.S. have contracted hepatitis C, a blood-borne disease that is blamed for 15,000 deaths annually. Persinos saw the new drug, called Olysio, as a huge driver of future growth for Johnson & Johnson.

The company released strong first quarter results on Tuesday—and Olysio played a major role.

New Treatments Keep Pharmaceutical Sales Rising

During the quarter, Johnson & Johnson’s overall sales rose 3.5% from a year earlier, to $ 18.12 billion (including a 1.8% negative currency impact), topping the Street’s expectation of $ 18.04 billion.

On an adjusted basis, per-share earnings rose 6.9%, to $ 1.54, also beating the consensus forecast of $ 1.48.

The Pharmaceutical business continues to drive the company’s sales growth: the division’s revenue jumped 10.8% from a year ago, to $ 7.5 billion, thanks in part to strong sales of new drugs like Zytiga (prostate cancer), Xarelto (an anticoagulant) and Invokana (type 2 diabetes).

A stronger-than-expected launch for Olysio contributed $ 354 million to the division’s sales, as doctors began to prescribe the drug in combination with another treatment from Gilead Sciences (NasdaqGS: GILD).

“Yes, it’s done better than we expected,” said CFO Dominic Caruso in the post-earnings conference call. “It’s primarily due to the fact that the Liver Society issued guidelines in January recommending the use of Olysio, along with the product from Gilead, Sovaldi. That has been adopted by the community, by the medical community as a standard of care.”

Elsewhere, the Consumer business’s sales fell 3.2% in the quarter, while sales at the Medical Devices & Diagnostics segment were flat. The Consumer division continues to work on winning back consumers after a number of major product recalls in recent years, while medical device sales have been held back by the weak global economy and austerity measures, both in the U.S. and international markets.

Meanwhile, the company continues to cut its costs and sell slower-growing businesses. In January, it announced plans to lower its expenses by $ 1 billion over the next three years. It has also agreed to sell its blood-testing operations to private equity firm the Carlyle Group for $ 4.0 billion. The deal should close toward the middle of this year.

The strong quarter prompted Johnson & Johnson to raise its full-year earnings guidance to $ 5.80 to $ 5.90 a share, up from its previous view of $ 5.75 to $ 5.85.

Dividend, Earnings Streaks Set to Continue

The company has managed to increase its adjusted earnings for 30 consecutive years, and that streak appears to be in no danger, with analysts forecasting profits of $ 5.83 a share this year, more or less in line with the company’s updated estimate. The stock trades at 16.9 times the Street’s 2014 forecast. Analysts are expecting earnings to climb to $ 6.29 a share in 2015.

The company also has one of the longest streaks of consecutive dividend increases of any U.S. stock, raising its payout for 51 consecutive years. It currently yields 2.7%.

Get full access to all of our research on Johnson & Johnson—including our crucial buy-under target on the stock—when you try Personal Finance todayRight now you can road test all of the advisory’s latest picks for yourself with our unbeatable 90-day trial subscription offer. Simply click here to start yours now.

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