Tuesday, 14 July 2015

Johnson & Johnson: the biggest barrier to buying big remains the long-term buyers

The last time I wrote about Johnson & Johnson I observed that:

'The company has a high quality problem.  It has little net debt, its current 2.8% dividend yield is covered a couple of times and thematically they are in attractive longer-term areas.  Yes, biosimilars might impact over time in the pharma unit (apparently negligible impact for 2015) and in the medical devices division they have not grown and even lost market share to some smaller players (as disclosed on the conference call).  But the latter division has a big pipeline and 30 new products coming on stream.  In other words it will be fine over time.  They even downplayed their M&A ambitions noting that most of the deals they do are relatively small.  
In short a generation or two ago you may not have been fired for buying IBM but today Johnson & Johnson is one of that small grouping of stocks that fit that billing. 
And that’s the problem.  
Want to know why the company is doing a sideways shuffle at the $100 share price level?  Well for those longer-term focused pension funds following an easy law of round numbers strategy of buying it every time the mythical and magical $100 share price looms into view cannot be critiqued'

Guess where we are today?  Just below that US$100 level...


There was little in today's results to make longer-term holders change their thesis with - as noted below - the company hitting their key near-term priorities...

...even if FX translation considerations meant that there was a material difference in 'reported' and 'operational' sales...


...plus sequential earnings were negative (impacted too by divestment impacts).

Judging by some of my notes from the conference call longer-term holders are not going to be perturbed by some FX related impacts even if sales did plummet at the hepatitis C treatment Olysio due to new product launches by Gilead and AbbVie.  The pharma pipeline potential noted in a graphic above more than makes up for this. In terms of other observations from the call: 

Biosimilars are not generics…market will react quite differently (to an introduction)

Admitted behind in Medical Devices but committed on innovation, ‘pioneer the operating room of the future’ (working with Google)

‘everything starts with innovation’

anticipate at least one major launch each year for the next 3 years in vision care with scope to disrupt

$1bn of ongoing cost cuts

'Uniquely positioned' to link aspects of healthcare industry 

Strategic focus – want to be #1 or #2 ‘we demonstrated that we would divest it’ if this is not the case

$15bn of net cash

sales constant currency +1-2% so $75-76bn estimated for FY15e

M&A scope - 'want to be #1 or #2 in the market place...always interested in growth opportunities'


The valuation - with the corporate progression - is slowly compressing and prospectively is a little over x11 EV/ebit and x15 P/E: nothing that will worry longer-term holders.  For myself - and my pension fund - how I wish we could crash through the US$95 level like last Autumn.  That's a good bad day level for me to buy shares in the company in a world that remains macro challenging.  

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