FOOL PLATE SPECIAL: An Investment Opinion
Second-quarter results at Johnson & Johnson topped estimates again as strong pharmaceutical sales led the charge. This diversified healthcare, drug and biotech giant has grown sales 11% compounded annually for the past 100 years, and more of this consistent growth appears on tap. As a result, J&J's stock may be poised for continued outperformance while providing lower-than-average risk.
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Johnson & Johnson is arguably the world's most diversified healthcare company, selling pharmaceuticals, professional products for hospitals and doctors, and consumer care products, including Tylenol, Neutrogena and Band-Aids. Once again, the high-margin pharmaceutical division propelled sales and earnings growth. Worldwide pharmaceutical sales rose 13.9% to $3.2 billion due to a 23.6% gain in domestic sales. J&J's leading drugs provide treatments for anemia, chronic pain, psychosis and general infections.
Professional product sales rose 5.1% to $2.6 billion, and consumer product sales rose 1.2% to $1.7 billion. Overall, J&J's margins remain at record highs, with gross margins hitting 70%, operating margins of 24.9% and net profit margins a strong 17.7%.
So What?
After a weak performance that ended in 1998 when the company was blindsided by competition in the professional products market, Johnson & Johnson has shown consistent and strong results for the past six quarters. These better results appear likely to continue. For one, given its broad diversification, J&J has more "levers" that it may push and pull in order to continue to achieve double-digit earnings growth.
By spending more than $2.5 billion per year on research and development, J&J will continue to drive its sales and earnings higher primarily through its pharmaceutical division. The company has several drugs in late development, including advanced treatments for arthritis, a drug for cardiovascular ailments, a new antidepressant that should offer patients fewer side effects than old antidepressants, a contraceptive patch worn on the skin, and a hormone replacement drug, among others.
Flanking its leading drug division, J&J's consumer product division continues to generate consistent free cash flow (even if it isn't high margin) and its professional products division is now growing again and doing the same. J&J has even begun to regain market share in its coronary stent business due to product innovation. Finally, a new wheelchair that can climb stairs is encouraging to a large market. All in all, the three divisions at the company are performing well.
Now What?
The Motley Fool Drip Portfolio purchased stock in Johnson & Johnson in 1997 and continues to regularly buy shares. We invested partially because the company has grown its annual sales for 66 consecutive years. In fact, J&J's sales have grown 11% compounded annually over the past 100 years. Plus, in 1999, about 33% of sales were derived from products introduced in just the past five years, so the company is not resting on past success. J&J has also increased its dividend by a double-digit rate annually for nearly the past four decades.
Investors seeking consistent growth and relative safety in a diversified healthcare and pharmaceutical leader should consider J&J as one way most likely to obtain their long-term objective. J&J is also a safer way to participate in gains from biotechnology. Johnson & Johnson has the means to buy biotech firms (it bought Centocor in 1999 for over $5 billion) and it stands to benefit in drug development due to genomic discovery.
At $95, the stock trades at 25 times year 2001 estimates of $3.80 per share, which puts it at a modest discount to the S&P 500. If you wish to dollar-cost average into the stock over the years (buying regularly in small to large dollar amounts), J&J offers a free dividend reinvestment program. Once enrolled, you don't need to pay any commissions to make purchases.
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