One year ago, two Fools traded virtual punches over Johnson & Johnson
Bulls on parade
Steven Mallas traded his jester's cap for a set of bullish horns, in shocked disbelief that anyone would actually take the opposite view.
This is, after all, the very blueprint of a blue chip, a company so large and so well known that introductions are pointless. Working through more than 200 subsidiary operations, J&J is a giant in health care and consumer goods fully on par with Merck
There was a 44-year history of annual dividend growth (45 years now), $50 billion in annual sales, and a most impressive long-term stock chart. "The pharmaceutical industry will be important to baby boomers, as well as to everyone else for an eternal time period," Steven said. "J&J will take advantage of that need. It will reap huge amounts of free cash flow from its drug development and its consumer-products division."
Brian Lawler wielded the bear claws, and the battle was on. Brian agreed that J&J was a great company with a blue-chip pedigree, but he thought the gravy train had reached the end of the growth line.
"Sure, flat operating margins and slow operating-income increases can be forgivable if revenues continue to grow strongly, but sales growth has been anemic in recent years for J&J," he said. Declining sales of drug-coated stents and expiring drug patents spelled more trouble for the company, and with such a massive market cap, it just wasn't realistic to believe in much more growth. And new drug development is such a risky and costly business that you just never know what J&J's future will look like.
Our readers thought Steven had made his point and gave him 71% of 263 votes. Brian had to settle for 19% of the ballots, and 10% remained undecided. That's a landslide bullish victory on the popular vote.
Je t'aime ... moi non plus
Mr. Market tells a different story. The share price went south over the summer, losing nearly 10% of the cap value it sported late last November. A recent rally has brought J&J back into the black, but the stock still hasn't even matched the performance of S&P 500 Spiders
The CAPS community still loves J&J, though. About 95% of more than 5,400 players with an opinion on the stock give it a thumbs-up, and its rating oscillates between four and five stars. A recent re-Duel over the company also showed that a Foolish bull argument still makes sense -- the landslide victory margin turned into a veritable avalanche this time. All in all, this referee has to award the victory to Steven and the bulls. Congrats!
Don't get me wrong
Aside from technicalities like community votes and stock performance, I have to tell you that Johnson & Johnson is a peerless juggernaut of a company that looks more undervalued than stalled today.
The stock's enterprise value trades today at just 21 times trailing-12-months free cash flow. The only time in the past 12 years the stock was available on the cheap like this was when Merck's Vioxx woes dragged the whole sector down in 2004. Otherwise, price-to-cash-flow ratios like to hover around the mid-30s or better.
This massive discount only makes sense if J&J somehow broke in the past couple of years. I don't think it did. In fact, the company looks healthier than ever as baby boomers get set to retire soon. J&J has fortified its consumer products department with a few choice acquisitions, too. I have to agree with Steven: What's not to love?
You might agree -- maybe you don't. Either way, I'd encourage you to mosey on over to Motley Fool CAPS and tell everybody why you feel that way. Click here, rate the stock to taste, and pen a glowing sonnet or scathing diatribe on the company, this article, or the baggage retrieval system they've got at Heathrow -- whatever concerns you the most. It's fun, it's free, and you'll make us all a bit smarter.
Pfizer and Colgate are Motley Fool Inside Value recommendations; J&J is a current Motley Fool Income Investor pick, and Merck is a former one. Find more great dividend payers or fire sales with a free, 30-day trial pass or two. Curiosity killed the cat but made the value hound a better investor.