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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Johnson & Johnson (JNJ) |
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Selected Analyst Coverage (Target): Deutsche Bank — Buy ($73) Prudential Equity — Neutral ($73) Credit Suisse — Underperform ($61) |
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JNJ Closed at $61.83 on 3-5-07 |
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Released 3-6-07 |
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Johnson & Johnson (ticker: JNJ) is a manufacturer and seller of consumer healthcare products, pharamaceutical drugs, and medical devices and diagnostic (MD&D) equipment. · Johnson & Johnson is the owner of a variety of well-recognized consumer products, including Band-Aids, Motrin, Neutrogena, Tylenol, Listerine, and Nicorette, among others. Several products were acquired in Johnson & Johnson’s $16 billion cash purchase of Pfizer’s consumer healthcare division in June 2006, a transaction we believe will add significant value to JNJ shares as the company leverages its consumer products expertise. We expect revenue growth from consumer products to be about 7-8% annually, with international growth of approximately 10% being offset by slower US growth of 4-5%. Still, Johnson & Johnson’s excellent brand recognition should translate to fairly stable and profitable sales from this segment far into the future. · The pharmaceutical division has a healthy pipeline of potential new drugs to complement recent approvals for Invega (schizophrenia), Ionsys (post-operation pain reducer), and Prezista (HIV), along with its current portfolio. Johnson & Johnson is currently targeting 10-13 new filings and approvals for drugs in 2007, and we believe they are on their way to meeting that goal. Although patent expirations for key drugs including oral contraceptives and Duragesic will likely have a negative effect on revenues in the near future, pharmaceuticals should continue to contribute annual revenue growth upwards of 5%. · The MD&D division is currently struggling due to safety concerns over the use of drug-eluting stents (DES). These safety concerns will likely have a negative impact on revenue for Johnson & Johnson’s Cordis subsidiary, and bring into question Johnson & Johnson’s $1.3 billion purchase of Conor Medsystems. While growth this year from MD&D will likely be limited to low-to-mid single digits (we assume 4.5% for our model), this division should contribute 6-7% annualized growth in the future. · Johnson & Johnson greatly benefits from a rock-solid balance sheet and enormous free cash flow generating abilities. The previous year’s free cash flows exceeded $10 billion, and long-term debt from the most recent quarter was only $2 billion. One analyst report suggested that Johnson & Johnson could drive growth by increasing financial leverage, and its healthy financial state and AAA credit rating should give it the ability to make strategic acquisitions that increase shareholder value. Johnson & Johnson has a free cash flow return on invested capital in excess of 40%, a value far in excess of the firm’s cost of capital. Levering up the company could play an important role in boosting growth, as long as the acquisitions show the same ability to generate free cash flow as the current core products. · Given Johnson & Johnson’s anticipated earnings growth, its balance sheet position, cash flows, and business risk, our fair value target for JNJ is $73.75, putting JNJ shares as being undervalued by approximately 19.25% based of Friday’s closing price of $61.83.
Disclosure: The analyst has no position in JNJ or its derivatives. |
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