Why Johnson & Johnson Is a Spectacular Company

J&J's success across its diversified business segments stands in stark contrast to the relatively tepid results from Pfizer and Bristol-Myers Squibb.

Jan 29, 2014 at 10:30AM

The results are in, and they're fantastic. Johnson & Johnson (NYSE:JNJ) has provided its fourth-quarter and full-year 2013 report, and the clear takeaway is that last year was a great one.

J&J operates a diversified business that includes pharmaceuticals, medical devices, and a world-class consumer franchise. That gives it reliable growth, and much-needed insulation against weakness in any one specific area. This is why J&J should be considered more valuable than other huge pharmaceutical companies, such as Pfizer (NYSE:PFE) and Bristol-Myers Squibb (NYSE:BMY), that have diversified businesses, and are struggling as a result.

Currency and one-time charges mask J&J's strong results
Frankly, it seems there's very little for the market to complain about when it comes to Johnson & Johnson's report. Sales and earnings increased in the fourth quarter and for the year. Growth was impressive, across the company's operating segments.

However, it takes a little digging to see how well J&J really performed during the year. That's because its top and bottom lines are affected by certain items that hide the underlying performance of the business.

In all, revenue grew 6.1% in 2013. If you exclude the impacts of unfavorable currency fluctuations, the results are even better. 'Operational' sales, as J&J puts it, increased 7.7%. Total revenue was depressed because it gets a significant portion of its sales from overseas. When international currencies fall against the U.S. dollar, those foreign sales are worth less, once they're converted to U.S. dollars.

On the earnings front, J&J performed well. However, once again, the company's results were artificially weighed down by special items, which include litigation expenses, an in-process research and development charge, and acquisition costs. If you strip away these non-recurring charges, J&J produced 8.2% diluted earnings-per-share growth in 2013.

Compare this to pharmaceutical pure-plays like Pfizer and Bristol-Myers Squibb. Pfizer spun off its animal health-care segment, and its consumer business accounts for a fraction of its overall revenue. Pfizer's year-to-date revenue is down 7%, and adjusted EPS is up just 1%.

Meanwhile, Bristol-Myers Squibb has performed much better on the surface than its true underlying results show. Its GAAP EPS has nearly doubled over the first three quarters, but that's only because last years results were negatively affected by a huge impairment charge. Its adjusted earnings were actually down 14%. Sales rose nearly 9% in the most recent quarter, but are still down 11% year to date.

Don't judge J&J by the market reaction
Curiously, Johnson & Johnson sold off after releasing its fourth-quarter and full-year report, even though its numbers widely beat analyst estimates. Its results only proved what a strong company it is.

While many other companies are struggling to generate growth, J&J has no such issues. It's simply a world leader in its key industries. J&J is growing across its pharmaceutical, medical devices, and consumer businesses.

It's also important to note that even after last year's run up, the stock is still not expensive. J&J trades for just 16 times its 2013 adjusted EPS. By comparison, the market trades for a trailing earnings multiple in the high teens.

Even better, J&J offers investors a nearly unmatched track record of paying dividends. It's raised its dividend for a spectacular 51 years in a row. And, this is no token payout: J&J yields nearly 3% at recent prices, handily beating the yield on the broader market. Any Foolish investor looking for a high-quality company that offers growth and income, at a reasonable price, should give Johnson & Johnson its due.

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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