J&J looks well set for steady growth
SUCCESSFUL INVESTING by Andrew Leckey
Q. I would like to know if I can expect my shares of Johnson & Johnson to finally break out. — P.K., via the Internet
A. The world's largest and most diverse health-care company, known for products such as Band-Aids, Listerine and Acuvue, is coping with a slow economic recovery.
While 70 percent of its products rank No. 1 or 2 in their segments, high unemployment and delayed equipment purchases by hospitals are expected to take their toll on this company founded in 1886.
It will eliminate as many as 8,200 jobs, or seven percent of its workforce, with the largest portion of cuts overseas. Layers of management are being reduced throughout the company, decision-making is being streamlined, and closure of some facilities is being considered.
Johnson & Johnson (JNJ), a component of the Dow Jones industrial average, is up three percent this year following last year's eight percent rise. It has one of the industry's best balance sheets and is implementing a $10 billion share-repurchase programme.
Major drug companies face patent expirations on blockbuster drugs and a longer and more expensive regulatory approval process. Big pharmaceutical firms such as Pfizer, Eli Lilly and AstraZeneca are cutting larger percentages of their workforces than J&J.
As a diversified company that markets surgical devices and consumer products in addition to drugs, J&J does benefit from less exposure to the stresses of pharmaceuticals. It boasts a quality drug pipeline and has received some important US approvals for new drugs.
Nonetheless, revenue has fallen due to generic competition for its antipsychotic drug Risperdal and epilepsy treatment Topamax, while the Food and Drug Administration this year required stronger warnings on several J&J drugs.
The consensus rating on shares of Johnson & Johnson is between "buy" and "hold," according to Thomson Reuters. That consists of four "strong buys," nine "buys" and eight "holds".
J&J expects a pretax cost savings from its restructuring of as much as $900 million next year and, upon completion in 2011, up to $1.7 billion. To diversify into potentially lucrative areas, the company has acquired Cougar Biotechnology, while buying stakes in Dutch biotech Crucell NV and Irish biotech Elan Corp.
Earnings are expected to increase one percent this year versus a flat performance expected for major drug manufacturers. Next year's projected eight percent rise compares to 10 percent forecast industry-wide. The five-year annualised return is estimated to be seven percent versus six percent for its peers.
