We knew the day would come. We didn't look forward to it. But it is bittersweet: Chairman and CEO of Johnson & Johnson (NYSE: JNJ), Ralph Larsen, has announced that he will retire on July 1 after 38 years with the company. The 63-year old Larsen will not even remain on the Board. He's truly entering a new phase in his life -- a post-J&J phase.
Ralph Larsen began working at Johnson & Johnson when he was a strapping 25 years old in 1964. He was there for more than seven dozen acquisitions, for the Tylenol tragedy, and through some of the darkest bear markets (including 1973 to 1974) and strongest bull markets in history.
We feel as though we're on a first name basis after receiving Ralph's midyear and semiannual reports for nearly five years. We call him Ralph with admiration and affection. The only individual stock that my fiancï¿½e owns is Johnson & Johnson, and whenever a letter would arrive in the mail from the company she'd say, "Let's see what Ralph has to say this time. They're buying a new company. Net income is up 16%. Cash, debt, fine. Everything looks good. Ralph seems like such a nice man. We love Ralph!"
Owning only J&J, she has done much better in the stock market than me or anyone else I know during the last two years. Johnson & Johnson has gained 28.5% (before dividends) since the end of 1999, plowing right through the storm. But the last two years are just a small cherry atop a giant ice cream sundae of achievement.
An incredible record
Larsen took the helm of J&J in 1989. The stock has returned greater than 22% compounded annually since then. Under Ralph, J&J's market value soared from $14 billion in 1989 (it was practically a small cap by recent standards) to $182 billion at the start of this year. Sales rose from $9 billion a year to $33 billion. Net income grew from $1 billion annually to $5.7 billion. Larsen's rein at the company resulted in a performance no less impressive than that of Roberto Goizueta's famous run at Coca-Cola (NYSE: KO).
Larsen is leaving with the company's value a mere fraction below its all-time high on the heels of another record-breaking year. But hopefully he isn't leaving at the top. Demonstrating amazing management stability, Larsen was only the fifth Chairman in the company's 116-year history. Larsen will be succeeded by new CEO and sixth Chairman William "Bill" Weldon. Bill Weldon has been at the company for three decades, and, along with James Lenehan who is the new President and current Vice Chairman, he has been running operations the last year.
So, Bill is our new guy -- a man who has been prepped for the job for several years.
But let's not let J&J's sun set on Ralph just yet. His last full year at the company was a crowning achievement. Sales rose 10.6% to $33 billion; excluding special charges, net earnings rose 18% to $5.9 billion and earnings per share rose 17% to $1.91. (Including charges, net earnings, and EPS both rose 14%.)
Free cash flow also was a record $7.2 billion. Twenty-one percent growth in domestic pharmaceutical sales helped, as did steady margins in a tough environment. Gross margin was 71.1%, down one percentage point, but operating margin rose one percentage point to 24.2%. There isn't a balance sheet or cash flow statement to consider yet.
Management, which has been accurate in its guidance the past four years, stood by 2002 earnings per share growth estimates of 16.2%, to $2.22 per share, and guided expectations to the low-end of 2003 estimates, meaning about $2.55 per share. That would be 14.8% growth over 2002. Following two years of strong growth in a weak economy, these estimates look more than satisfactory -- plus they're coupled with a growing dividend. And the stock's valuation? Though trading at about 30 times earnings, J&J is at about 25 times free cash flow.
A farewell to Ralph
Well, Ralph, we have only a few short months remaining with you as our investment's Chairman and CEO. We thank you and your company for the more than four excellent years that Drip Port has enjoyed investing in J&J, and we wish all J&J employees continued success. We hope that we'll be investors much longer and see continued expansion.
But you, Ralph, have probably managed the company's largest expansion that we're going to see -- from $14 billion to $180 billion in value in just 13 years. You've done incredibly. Running a business so well, with thousands of satisfied employees and shareholders, is a work of art. Whatever you do in retirement, we hope that you enjoy it.
If you'd like to thank Ralph Larsen, congratulate him on 38 years, or wish him luck, post your message to him on the J&J discussion board. Stay Foolish!