Has Johnson & Johnson Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, and then decide whether Johnson & Johnson (NYSE: JNJ  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that the company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Johnson & Johnson.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

1.9%

Fail

 

1-year revenue growth > 12%

3.4%

Fail

Margins

Gross margin > 35%

67.8%

Pass

 

Net margin > 15%

16.1%

Pass

Balance sheet

Debt to equity < 50%

26.4%

Pass

 

Current ratio > 1.3

1.87

Pass

Opportunities

Return on equity > 15%

17.4%

Pass

Valuation

Normalized P/E < 20

22.37

Fail

Dividends

Current yield > 2%

3.2%

Pass

 

5-year dividend growth > 10%

8.4%

Fail

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Johnson & Johnson last year, the company gained back one of the three points it lost from 2011 to 2012. Rising margins brought on the improvement, and the shares have responded well, climbing almost 20% over the past year.

Most investors think of Johnson & Johnson's consumer products as the leading edge of its massive health-care business. But what elevated J&J into the ranks of the Dow Jones Industrials (DJINDICES: ^DJI  ) is its diverse set of larger segments, which include both pharmaceutical development and medical-device manufacturing.

In fact, J&J's pharmaceutical business is well-poised to challenge other industry leaders. With the company having relatively little exposure to patent-cliff issues, J&J is taking aim at rivals' blockbuster drugs. For instance, its Invokana drug to treat Type 2 diabetes proved itself against Merck's (NYSE: MRK  ) Januvia, giving it the inside track to become the first FDA-approved SGLT2 inhibitor. Meanwhile, sales of J&J's anti-inflammatory Stelara hit $1 billion in 2012, and with the drug showing significant improvement compared to Amgen (NASDAQ: AMGN  ) and Pfizer's (NYSE: PFE  ) Enbrel, it has even more potential to grow.

The big question facing J&J, though, is whether it should follow the trend of other major pharmaceutical companies and break itself into its component parts. For the most part, CEO Alex Gorsky seems to like the company's conglomerate nature, although he may be open to minor strategic moves such as selling off its diagnostics business.

For J&J to improve, it needs to get its earnings growing a bit faster and produce a little more dividend growth. Blockbuster drugs might be just the ticket to the success J&J needs to get closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

J&J takes a lot of criticism that it's nothing but a bloated corporate whale. In our premium report on J&J, you'll get our top health-care analyst's view on whether the company is past its prime or still primed to provide huge growth in the future. Don't wait -- claim your copy, along with a year of free analyst updates, by clicking here now.

Click here to add Johnson & Johnson to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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  • Report this Comment On February 20, 2013, at 4:52 PM, mgriff4752 wrote:

    These "perfect stock" headlines are now no more than gimmicky teasers. Come up with something new.

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