Stick'em Up (JNJ, MMM, ICI)

By Dean Lundell | March 29, 2007 AAA

Adhesives are big business and so are the companies in it.

Three in particular are of interest at the moment -- Johnson & Johnson (NYSE: JNJ) is the giant with a market cap of $177 billion, 3M (NYSE: MMM) with a market of $56 billion and a smaller, mid-cap company in the U.K., Imperial Chemical Industries (NYSE: ICI) with market cap of not quite $12 billion. There is a lot more to these firms than just glue, and they could provide more than a bandage for your portfolio.

Something Old, Something New
Every time you cut or bruise yourself, your first move is to getting one of Johnson & Johnson's band-aid products, and you might think that's probably all they produce, right? Nothing could be further from the truth.

With their research pipeline, wide revenue base and exceptional ability to generate cash flow, JNJ is a leader in every segment of their markets (To learn more about segment data, please see The Importance of Segment Data). In fact, that corporate culture permeates every one of their business lines.

The pharmaceutical division has eight different drugs that generate over $1 billion each. Although JNJ faces expiration on a number of their patents, they also have fifteen new drugs in the latter stages of development, some of which have significant potential.

What differentiates JNJ from other pharmaceutical companies is that over half their revenue comes from other areas of the firm. That helps cushion any adverse impacts that competing firms might have to endure.

To continue to prosper, JNJ will have to have meaningful sales from new drugs as patents expire on old ones and generic drugs enter the market. In addition, JNJ would be hard pressed to squeeze any more overhead out of their businesses. JNJ is also facing increasing competition from other companies in acquisitions they try to make. With JNJ's entrepreneurial spirit and a record of sales growth and dividend increases, they just might pull it off.

Stick with This
Any company that can transform a glue that failed to stick and make it into an everyday product that everyone uses deserves a look. You do use Post-It notes don't you? That product's inventor, 3M, is well noted for its innovation culture and research and development expertise. Management is making a concerted effort to couple that with their global presence and focus on high-margin, fast growing products and you have a firm that is clearly not settling for second best.

3M does have to work its way through some problems. Earning for the last year were considerably more volatile than in years past and they have a yet to be determined exposure to asbestos liability.

After stalling out during the 1990's, 3M is on the rebound and trying to find synergies across product lines along with new uses for old technologies. Lastly, management has announced a share buy back program of $7 billion over the next two years.

Paint it Black
In their efforts to create a diverse and entrepreneurial corporate culture, Imperial Chemical Industries has created an unmanageable sprawl. Their paint business consists of eight different brands in the U.K. and another five in the U.S. Some of these brands cooperate but some actually compete with each other. Their National Starch brand has a dozen different businesses across four separate and different divisions.

Management envisioned a highly diverse environment where natural synergies would evolve. While an admirable goal, what they ended up with, is a convoluted consortium of inter and intra competing products.

The company's goal is to divest itself of under performing products and divisions to lower costs in North America and Europe while endeavoring to increase sales in Asia.

Bigger not Necessarily Better
You may think at first blush that bigger, as in the case on JNJ and MMM, means better. But that isn't necessary the case. It's the commitment to research, development and ability to innovate that separates the winners from the rest.

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