Is It Time to Start Buying Johnson & Johnson (JNJ)?
Shares of healthcare giant Johnson & Johnson have been under pressure since hitting a high of $186.69 in late April. Those shares closed Friday night at $168.18, down 9.3% from their peak. The news was steady. A steady drumbeat of negativity preoccupies you.
From the US government’s announcement of its intention to halt purchases of Covid-19 vaccines (not that JNJ wasn’t prepared for this) to the company’s announcement that it will no longer sell talc-based baby powder worldwide, to new law from the Biden administration allowing some drug prices to be negotiated (another item that won’t shake JNJ), in this morning’s news…
Apparently, JNJ will use the strategy used in Texas and other states as well, to create a subsidiary that will own all of the company’s talc-related liabilities and then place that subsidiary into bankruptcy protection. You do not like it; Maintains equity valuation.
Back in July…
Johnson & Johnson released the company’s second quarter earnings. The company posted adjusted EPS of $2.59 on revenue of $24.02 billion. These numbers exceeded expectations on both the top and bottom lines. The revenue print was good enough for a year-over-year increase of 3%, or 8.1% on an adjusted operating sales basis. Regardless, JNJ won over Wall Street. Globally, these sales numbers suffered from a negative 5% currency-related impact.
Overall, it was a solid quarter. The Pharmaceuticals and Consumer Healthcare sectors outperformed Wall Street, while the MedTech segment fell slightly below expectations. However, the guidance was muted.
For the full year, JNJ maintained guidance of $97.3 billion to $98.3 billion for operating sales, which could work with adjusted operating sales growth of 6.5% to 7.5%. JNJ cut its estimate for “reported” sales to $93.3 billion – $94.3 billion due to a negative currency impact. JNJ cut its outlook for adjusted pre-tax operating margin to unchanged from a year ago from a previously guided 50 basis point improvement. On the earnings side, JNJ now sees full-year adjusted EPS ranging between $10.65 and $10.75, which narrowed the range by a nickel at each end without affecting the mean.
Do not forget!!
In November last year, Johnson & Johnson announced its intention to split its consumer division within 18 to 24 months by creating two companies. Without going into details, the move will allow JNJ to focus more on its higher-margin pharmaceutical business, while its slower consumer-focused growth could focus on wellness and personal health startups. It sounds far away, but if the split is on schedule, it’s now less than 9 to 15 months away.
At the end of this July quarter, JNJ had a net cash position of $32.568 billion, which was up from previous quarters, thanks to free cash flow reaching $1.79 per share, which was the highest in three quarters, and the second highest per share no Cash Flow Print for the company in six. Inventories reached $11.437 billion, dragging current assets to $63.847 billion. Current liabilities, which were flat, were printed at $44.821 billion, putting the company’s current ratio at 1.42, which is healthy and up from 1.39 last quarter. Excluding stocks, the company’s quick ratio comes in at 1.17. It’s also a healthy number.
Total assets are $177.724 billion, including “goodwill” and other intangibles of $76.574 billion, which at 43.1% of total assets, is a bit much for my taste. Total liabilities minus equity are $101,367 billion, including $28,292 billion in long-term debt. That’s a pretty strong balance sheet. On the bright side, the company could, if needed, repay its entire debt out of pocket.
On the other hand, total assets minus intangible assets have a slightly lower face value than total liabilities. I do not like this. At the end of the quarter, the company’s tangible book value was -$0.08 per share. While I can’t support this line running with a minus sign in front of it, this was the closest JNJ had come to positive tangible book value per share since the cows came home (2017).
I really think the (stock) ball is starting to roll in the right direction. Fundamentals are improving. The balance sheet is not in bad shape at all. The stock trades at 16 times forward earnings, while paying shareholders an impressive $4.52 per year to hang on. That’s good for a 2.55% yield. (Note, the stock trades ex-div, payable on September 6th today.)
Additionally, the company appears to be as well run under CEO Joaquin Duato as it is under current executive chairman Alex Gorsky. I really like the idea of owning the shares (you have time) before the split into two companies.
My view is that JNJ presents itself as a defensive income stock that can potentially be bought on broader market weakness as we move into a period of increased uncertainty. My plan is to start with stock specific weakness. That could very well happen this morning. In a perfect world, I would like to add to the 61.8% Fibonacci retracement level of the December to April rally and then aggressively add to the well-established $153 support level.
While I’m waiting for my price, I see that the September 16th JNJ $165 positions are trading around $1.75 and that the November 18th JNJ $155 positions are trading around $1.95. This has my attention. I could consider making a sale and getting paid to wait for my fight.
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