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Johnson & Johnson
JNJ - Not Fully Appreciated

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By jammerh
March 7, 2006

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That most stocks drift with little real sense of direction, much of the time shouldn't be news to anyone except perhaps the newest of investors.

JNJ currently trades at roughly 17 times earnings. Although relatively cheap, that wouldn't seem to be a big deviation from the company's historical trading range.

Yes, it is down a bit off highs made last spring near $70, but pull-backs off any new highs are a common occurrence. Old-timers refer to it as "backing-and-filling", and think of it as a normal part of a process, which tends to result in a strengthening of the gradual, long-term climb.

Morningstar puts JNJ's intrinsic value at over $76. Pharmaceuticals still contribute the lion's share of earnings, but medical device income has been growing faster and now contributes 40%.

It should be clear JNJ intends to pursue further acquisitions in the medical devices market. This is a direction that seems to make sense for the company

JNJ earnings power is underestimated. Markets don't fully appreciate JNJs financial strength. The company is one of a select few that sport an AAA credit rating, and it has more than $16 billion in cash.

JNJ's total debt amounts to little more than $2 billion. Earnings cover fixed charges by a factor of more than 32, and operating cash flow has been strong in recent quarters.

Media attention over the failed take-over of Guidant has obscured the company's fundamental strengths, creating a rare buying opportunity.

JNJ invested more than a year in trying to take over Guidant, but Guidant was hardly a make-or-break-the-company-deal, and investigating possible acquisitions is an ongoing affair at JNJ.

Guidant will take in less than $4 billion in revenues this year - an amount equaling less than 7% of JNJ's revenues. JNJ regularly increases revenues by more than that amount in any single year.

JNJ hasn't lost that amount. To the contrary, it will be paid a fat sum of about 3/4 billion to compensate it for giving up its claim on Guidant, and in my estimation, chances are good JNJ can reinvest that and the price of Guidant elsewhere for similar return.

No doubt the company continues pursuing deals with even greater potential.


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