DRIP PORTFOLIO

<THE DRIP PORTFOLIO>
J&J by the Numbers
Drugs Fuel Q2 Growth

by Brian Graney (TMFPanic@aol.com)

ALEXANDRIA, VA (July 20, 1999) --It's time for our quarterly checkup with healthcare giant Johnson & Johnson (NYSE: JNJ). But unlike those occasional trips to the doctor's office, we won't be getting stuck with any nasty shots or prescribed horse pills to take for the next 90 years to clear up that pesky cough. Instead, our regular updates on J&J are becoming more and more like trips to the candy store -- they're actually fun.

After a strong start out of the blocks in the first quarter, J&J has maintained its quick pace through the first turn and up to the midway point of the 1999 earnings race. This morning, the company reported second quarter revenues of $6.9 billion, up 18.5% year-over-year and 4.5% sequentially. The revenue jump was spread throughout the organization's various business units, but U.S. pharmaceutical sales were particularly strong. (That's J&J's highest-margin business, so that explains the smiles on our faces.) Earnings per share were $0.84, up 13.5% from last year's $0.74 and $0.02 ahead of analysts' reported expectations.

Among the preferred moving parts that we track from quarter to quarter, gross margin (one minus the result of cost of products sold divided by total revenues) rolled in at 69.6%, in line with the historical trend. Selling, marketing, and administrative expenses as a percentage of revenues were 37.2%, up from last quarter's 36% but still within the 36% to 41% range we have come to expect from the company. Finally, R&D spending as a percentage of revenues was 8.4%, also in tune with the recent trend. Same old story, different quarter.

That's fine with us, of course. Consistency and steady growth are what we are looking for from J&J over our long-term investment period. Over time, we may see some margin improvement and operating cost reductions at J&J, but we expect any changes to occur gradually, not all at once. Like great wonders of nature such as the Grand Canyon and the Alps, we expect J&J to become more impressive over long periods of time through slow changes and variations.

Defying our "easy does it" expectations is J&J's pharmaceutical business, however, whose impressive growth in Q1 was put to shame by the unit's Q2 figures. For the quarter, overall worldwide drug sales rose 25.4% year-over-year and 8% sequentially to $2.7 billion. Excluding currency effects (primarily from the falling Euro), international drug sales rose 15.3% while U.S. sales increased at a blistering 37.3% rate.

The company indicated that up to $100 million of the U.S. drug surge can be attributed to a speculative inventory ramp up by drug wholesalers, who are trying to bump up their margins by acquiring drugs at the lowest prices possible. While that may sound initially worrisome, management explained that the increase has been a regular occurrence over the past four or five years, so future sales levels should not be greatly affected. We'll store that tidbit of information in our memory banks (i.e. in the Drip Port column archive) and see how things pan out in future quarters.

While we don't expect the U.S. drug sales to keep growing north of 30% year-over-year for every quarter on end, J&J is showing little sign of letting off the gas anytime soon. Its top products are selling very well and its pipeline looks to be in great shape, so more "ohhs" and "ahhs" may again rain down from the investing peanut gallery in future quarters. We'll have more to say about the growth of J&J's drug business and its pipeline when we review some points from the company's quarterly conference call in tomorrow's column.

Elsewhere, the company's other two major business segments are also humming along. Worldwide professional segment sales rose 19.8% from a year ago, thanks in large part to a 14% worldwide sales uptick for DePuy orthopedic products, an acquisition from last year. More inspiring is the outlook for the Cordis cardiovascular stent unit, which was a sore spot for the company a year ago. While Cordis sales were flat in the U.S. during the quarter, that could change in Q3 if the unit's recently FDA-approved MINI Crown Stent wins decent acceptance from surgeons.

Finally, J&J's rock-solid consumer products business saw sales rise 7.4% from last year, including a 15.9% increase in domestic sales. Among the star performers were a new line of Neutrogena-branded cosmetics, which were well received in the U.S. and abroad, Acuvue 2 disposable contacts, and Nizoral A-D nonprescription anti-fungal dandruff shampoo. Finally, the company's Benecol cholesterol-reducing spread is selling ahead of forecasts, and new Benecol salad dressings and health bars are to be rolled out in the future.

All in all, J&J's business appears to be in excellent health. As previously mentioned, we'll run through some of the highlights from the company's conference call tomorrow. To hear the diagnosis straight from the horse's mouth, dial (719) 457-0820 anytime until midnight Thursday and enter the access code 735335.

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7/20/99 Close

Stock   Close   Change
JNJ     96 7/16  +1/2
INTC    64 15/16 -2 5/8
CPB     43 11/16 +11/16
MEL     34 7/8   -1 3/4
              Day     Month    Year    History
Drip        (2.42%)  1.26%    5.17%    19.61% 
S&P 500     (2.17%)  0.32%   12.61%    46.60% 
Nasdaq      (3.47%)  1.73%   24.60%    71.42% 


Last Rec'd  Total# Security  In At    Current
 05/03/99    8.134   CPB    $52.793   $43.688
 07/01/99   21.066   INTC   $41.861   $64.938
 03/09/99    9.076   JNJ    $74.910   $96.438
 06/07/99   22.453   MEL    $33.488   $34.875


Last Rec'd  Total# Security  In At    Value    Change
 05/03/99    8.134   CPB    $429.42   $355.36  ($74.06)
 07/01/99   21.066   INTC   $881.84  $1367.98  $486.14 
 03/09/99    9.076   JNJ    $679.89   $875.27  $195.39 
 06/07/99   22.453   MEL    $751.91   $783.06   $31.15 


Base:  $2800.00
Cash:    $24.29**
Total: $3405.96

The Drip Portfolio has been divided into 110.619 shares with an average purchase price of $24.408 per share.

The portfolio began with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to have $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging, we don't expect to seriously challenge the S&P 500 for the first 3 to 5 years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. (NOTE: our investment in Campbell Soup is all but frozen due to fees instituted in its DRP plan.)

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</THE DRIP PORTFOLIO>