Drip Portfolio Report
Monday, September 29, 1997
by Jeff Fischer (TMF Jeff@aol.com)

ALEXANDRIA, VA (Sept. 29, 1997) -- Founded in 1885, Johnson & Johnson is only three years older than Abbott Laboratories, but last year the healthcare leader had twice the sales of Abbott, at nearly $22 billion. Over the last ten years sales grew to that amount from $8 billion in 1987, while the stock's book value has grown 230% to over $8 per share. The stock itself has compounded 20% annually over the past five years.

Priced at $58, Johnson & Johnson has a $77 billion market cap. (Shares outstanding of 1.33 billion multiplied by $58 per share = $77 billion market cap.) The company trades at 3.5 times sales ($77 billion market cap divided by $21.6 billion in trailing sales = 3.56 times sales.) During this decade the company has acquired more than thirty complementary businesses, and it now has operating companies in fifty countries and sells product in over 175. The largest healthcare company in the world, Johnson & Johnson has had 47 consecutive years of sales growth (this is the exact same number of years that Pfizer has seen sales increase).

Despite being so large it's easy to break this gorilla down by product division. Much like our other healthcare considerations, the business of JOHNSON & JOHNSON (NYSE: JNJ) is divided as:

1. Professional
2. Pharmaceutical
3. Consumer

In 1996, the revenue broke down as:

                           1996 Sales

                        $ mil.   % of total
Professional products    8,068      37
Pharmaceuticals          7,188      33
Consumer products        6,364      30

The profits landed as follows:

                         Operating Profit
                          $ mil.  % of total
Professional products     1,416      33
Pharmaceuticals           2,477      58
Consumer products           361       9
                         -------   -------
                         $4,254      20.3%

Dividing the sales numbers in the first table by the operating profits achieved (these numbers are obtainable from the 1996 annual report, which is available at www.JohnsonandJohnson.com), we can find the company's operating margins. In professional product sales, Johnson & Johnson had $1.41 billion in operating profit divided by $8.06 billion in sales, resulting in operating margins of 17.5%. In pharmaceuticals, $2.47 billion in profit is divided by $7.18 billion in sales, for 34.4% operating profits (in line with the margins that our other healthcare considerations enjoy on pharmaceuticals). In consumer products (always the slacker, eh?) we have $361 million in profit divided by a massive $6.3 billion in sales, resulting in a measly 5.6% operating margin. It takes a lot of skinned knees (Band-Aid sales) to make any decent money in the consumer division.

Overall operating margins are obtained by dividing total operating income ($4.254 billion) by total sales ($21.62 billion), which gives us operating margins of 19.60%. (When an expense not attributed to any one division is included in the 1996 numbers, the margin drops to 18.7%.) This compares to 29% for Schering-Plough, 27% for Pfizer, and 24% for Abbott Labs. After you consider taxes, Johnson & Johnson has net profit margins of 14%, compared to 21% for Schering-Plough, and 17% for Pfizer and Abbott.

Pharmaceuticals accounted for 58% of profits though being only 33% of sales. Tomorrow we'll take a look at what Johnson & Johnson is selling, how the divisions are growing, and how Johnson & Johnson hopes to grow in the future. The company is spending some two billion dollars on research and development this year, topping all of our considerations except for Pfizer. With half the sales, Pfizer is spending nearly the same amount as Johnson & Johnson on research and development.

Randy, by the way -- spending 18 hours per day behind a computer monitor -- is thought to account for 18% of Johnson & Johnson's Tylenol sales. If something should happen to him (he gets married or something) Johnson & Johnson would certainly suffer. This will be taken into consideration, though it isn't yet perceived as an immediate threat.

Fool on...

--Jeff Fischer, Fool