Listerine, Johnson’s Baby Lotion, Tylenol, ARN-509—all of these are Johnson & Johnson (NYSE:JNJ) products, but you probably wouldn’t keep the last one in your medicine cabinet at home. ARN-509 isn’t actually a physical product at all, but rather a treatment for prostate cancer. Johnson & Johnson acquired the rights and assets to ARN-509 through the purchase of its parent company, Aragon Pharmaceuticals, on Monday. The acquisition sent Johnson & Johnson shares higher on Monday and Tuesday, but at around $86 a share, is J&J a buy right now? Let’s use our CHEAT SHEET investing framework to decide whether Johnson & Johnson is a OUTPERFORM, WAIT AND SEE, or STAY AWAY.
Johnson & Johnson announced an 8.5 percent increase in sales in the first quarter of this year. Its pharmaceutical division was the primary contributor to this growth. The biggest seller in this division was the anti-inflammatory drug, Remicade, which sold $1.6 billion, up 5.2 percent from last year’s sales. The fastest growing product in J&J’s pharmaceutical line was the prostate cancer treatment Zytiga—its sales increased 72 percent over the past year and netted $344 million for the healthcare giant.
Johnson and Johnson’s recent acquisition of Aragon for almost $1 billion ($650 million plus $350 million if certain objectives are met) made financial headlines on Monday and boosted the share price 0.85 percent. The real purpose of the acquisition was to extract the ARN-509 division and its assets, while the rest of Aragon would be spun off into a new company independent of Johnson & Johnson. A billion dollars is a lot for a small pharmaceutical company, much less a single product, but J&J has a strong track record of picking acquisitions with strong future cash flows, despite the expensive initial cost.
Fundamentals Are Mixed
When performing a comparative analysis using several key metrics, it appears that, at a price of around $86 a share, Johnson & Johnson is relatively expensive compared to its major competitors and the industry as a whole. J&J’s price to earnings ratio has been hovering around an all-time high over the past several months and is significantly higher than one of its chief competitors, Pfizer (NYSE:PFE), as well as the average P/E of the major drug manufacturing industry.
Johnson & Johnson is currently paying a dividend of 3.1 percent, in line with its competitors and the industry average. It announced that it would increase its dividend payments by a rather attractive 8.2 percent over the coming year. Johnson & Johnson’s stable free cash flow margin and strong dividend payback ratio of almost 65 percent suggest that J&J can continue to increase its dividend each year.
|Growth Est. (year)||6.1%||0.9%||23.6%|
Technicals Are Strong
Johnson & Johnson is currently trading at around $86, slightly above its 50-day moving average of $85.77 and well above its 200-day moving average. The stock’s positive momentum has been unquestionably strong since the beginning of the calendar year, as you can see in the graph below. After the stock peaked at a price of $89.99 on May 22, there was a slight retracement (a short-term downward correction followed by a return to the previous upward trend), and it seems that the stock has regained its footing as of late.
Healthcare giants like Johnson & Johnson have performed extraordinarily well this year. Johnson & Johnson has a beta of 0.38, meaning that it will be less volatile than the market. This might bring peace of mind to some investors who have grown tired of the recent volatility in the markets. With its attractive dividend rate, historically strong free cash flow margins, and a low beta, Johnson & Johnson could be a good addition to a core retirement portfolio.
Johnson & Johnson offers solid growth potential, but for a relatively high price. The company expects to release ten new product filings and more than twenty-five new brand extensions by 2017. Additionally, this year, Johnson & Johnson has renewed many of its expiring patents for key pharmaceutical products. The short-term investor may want to wait and see if Johnson & Johnson becomes cheaper ahead of its second quarter earnings report, but for the long-term investor, Johnson & Johnson is an OUTPERFORM.
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