Drip Portfolio Report
Tuesday, August 26, 1997
by Jeff Fischer (TMF [email protected])

ALEXANDRIA, VA (Aug. 26, 1997) -- Hopefully everyone is now comfortable with the process of buying stock directly from companies. If not, please ask us or visit the Drip message board, because things are clipping right along here in Drip-land and we don't want anyone to feel left behind.

We're now working towards a second purchase following Intel. We'll write about Intel as the months roll by, of course, but first we're anxious to invest in at least two more companies by the third week of September. The next industry that we're venturing into is that of healthcare and pharmaceuticals. This is an incredible market that has created world-leading companies with earnings growth so consistent that it's almost frightening. As the country's largest generation in history (Baby Boomers) ages over the next twenty years, not only will the depressed real estate market in Florida finally improve (that's the hot tip for today), but leading healthcare stocks will benefit as well.

We're initially considering three companies. The nominees are:

JOHNSON & JOHNSON (NYSE: JNJ)
SCHERING-PLOUGH (NYSE: SGP)
ABBOTT LABS (NYSE: ABT)

We would also like to consider MERCK & CO. (NSYE: MRK), but Merck charges a fee to reinvest your dividends, and another fee each time that you make additional cash investments. The fees become substantial over twenty years so we're avoiding any companies that charge them.

Here's an overview of our three top options:

In the healthcare world, Johnson & Johnson is the largest and most diversified company, and the stock has been a steadily growing and reliable market beater. The company's products range from Tylenol, to Reach toothbrushes, to Acuvue contact lenses. All are top consumer brands. The company also sells leading professional products and pharmaceuticals. Johnson & Johnson has $22 billion in trailing sales and $3 billion in net income, for 14% net profit margins. The balance sheet shows $2.2 billion in cash and $1.3 billion in long-term debt. A leading innovator, the company also likes to acquire other innovators. Johnson & Johnson has made over thirty acquisitions in the past decade. The Fool's company snapshot on J&J offers information and a link to the company's Web site. The $57 stock trades at 23 times this year's earnings estimate, while the company is expected to grow 15% annually over the next five years. The dividend yield is 1.40%.

Schering-Plough just achieved its 11th consecutive year of double-digit earnings growth. 1996 earnings per share rose 16% while sales rose 11%, to $5.7 billion. Ninety percent of the company's revenue comes from pharmaceuticals, so it's not surprising that Schering-Plough sells many leading pharmaceutical brands, including Claritin. The company also sells leading consumer products, including Dr. Scholl's and Coppertone sun care. (Yes, they were responsible for those billboards that showed people getting their bathing suits pulled down by their trusty dog.) The company has $6.1 billion in trailing sales, 29% operating margins (J&J has operating margins of 20%), and 21% net profit margins (J&J is at 14%). The balance sheet shows $757 million in cash and $46 million in long-term debt. The company snapshot links to Schering-Plough's Web site. The $47 stock trades at 24 times 1997 estimates while the company is expected to grow 13% annually over the next five years. The dividend yield is 1.50%.

Finally, Abbott Laboratories makes pharmaceuticals, nutritional supplements, and hospital and laboratory equipment. The company is more consumer-oriented than it first seems, selling the leading infant formula (Similac), as well as shampoo, eye care products, and the number one adult nutritional supplement (Ensure). Abbott has $11.5 billion in trailing sales and nearly $2 billion in trailing earnings, for net margins of 17%. Operating margins are 24%. The company's bank account shows $134 million in cash and $931 million in long-term debt. The $60 stock trades at 22 times 1997 estimates, while the company is expected to grow 13% annually for the next five years. The current yield is 1.70%. For Abbott's website link, please see the company snapshot.

People who argue against investing in technology companies would probably argue against investing in these companies, too -- or should, if they wanted to remain consistent. All three companies are research and development intensive. Schering-Plough's 1996 annual report reads: "[The company] has staked its future success on discovering and developing new therapies that can bring real medical advances to physicians and their patients. We are, in every sense, a research-based organization. In 1996, we spent $723 million on research and development and expect to spend approximately $800 million in 1997."

All three companies are strong leaders. All three serve many different markets. We need to break down where their revenues are coming from and the probability of a majority of those revenues continuing, and continuing to expand. Perhaps then we can begin to grasp at the perceived risk each company faces over the coming years. A person can argue that Johnson & Johnson's Tylenol product has a much better chance of remaining a cash cow than Abbott Lab's Norvir drug has of ever becoming a cash cow. Hopefully a cure for HIV will come along and make Norvir obsolete.

The amazing thing about these companies is the good that they're doing for society, and the excellent profit that they're each able to achieve in the process. An investment in any of them would almost certainly prove successful over the next twenty years, but we of course want to find the best investment of the three. That will take some digging, some taking apart, some extrapolating, much estimating, and a lot of fun. It's probably a win-win-win decision in the end. That's what Foolishness should be. The next time I write, we'll start breaking down where these billions of dollars are being made for each company. It should be revealing...

Stay Foolish out there...

--Jeff Fischer