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Let Johnson & Johnson Band-Aid Your Portfolio
Johnson & Johnson (NYSE: JNJ) is sitting near an all-time high, and the future looks great for the global health care company. Everything from its Band-Aid brands to medical equipment are selling well as the overall market is in the middle of a bear market.
Stellar Second Quarter
For the first time ever, Johnson & Johnson's sales overseas outpaced those in the U.S. during the second quarter, thanks partially to favorable exchange rates. Total revenue for the quarter rose 9% over last year and reached $16.5 billion. International sales were a main driver, jumping 16% to $8.24 billion, slightly above the U.S. number of $8.21 billion.
The two areas within JNJ that experienced the best growth were consumer sales, and medical equipment and diagnostics. The consumer sales numbers can be credited to strong baby, dental care and allergy drugs. The heavily advertised allergy drug Zyrtec is now available over the counter and has been able to snag 27% of the non-prescription allergy market. Medical equipment and diagnostics were led by joint replacements and diabetes and vision care items. (Want more on evaluating medical companies? Check out Measuring The Medicine Makers.)
Going Global with Baby Boomers
The second quarter earnings report is attractive, not only from the actual numbers standpoint, but more so where the growth came from. By growing the business overseas, it takes away the dependence on the U.S. consumer and diversifies the business into high growth areas. There is also the baby boomer effect on the numbers.
As the U.S. baby boomers age they will need more health care products for specific ailments. Looking at areas that did well from dental care to joint replacements to diabetes to vision care, the baby boomers will be demanding products regardless of recession fears.
Bear Proof Band-Aids
Since closing at an all-time high on October 9, 2007 the Standard & Poor's 500 Index (S&P 500) has fallen 21% and is not far from a new multi-year low. During the same time frame JNJ has gained 3% and is within one big day of setting a new historic high. The performance of JNJ proves that when a bear market hits U.S. stocks, there are places to put your money, one being a diversified pharmaceutical company.
The same cannot be said for the entire drug sector. Pharmaceutical HOLDRS (AMEX: PPH) is down 17% since October 9, 2007 falling nearly as much as the S&P 500. Though within this exchange-traded fund (ETF) there are a few names that have held up fairly well. Novartis AG (NYSE: NVS) is up 8% during the same and recently closed at a new 52-week high. The similarity between Johnson & Johnson and Novartis is that they are both considered recession-proof due to their products. However, their products differ more than the average investor would assume. NVS gets 63% of its sales from prescription drugs (branded and generic), whereas JNJ is a more diversified company. (Find out how to create a portfolio that is recession proof, check out Bear-Proof Your Retirement Portfolio and Recession-Proof Your Portfolio.)
Not All Healthcare Stocks Measure Up
Do not assume just because a company is involved in the pharmaceutical or healthcare sector it will side step a bear market. As evidenced by the drop in PPH, there are a number of stocks in the sector that are suffering. Well-known drug company Merck (NYSE:MRK) is down 40% from the October 9, 2007 high. Most recently the company reported earnings without any future guidance due to poor results of a Vytorin study. Vytorin is the cholesterol drug that has been under pressure for not actually helping prevent heart issues in patients with a blood flow issue called aortic stenosis.
The problem with drug companies that rely heavily on one or two products is that they win big but they also lose big. This is why I prefer Johnson & Johnson to its peers; the diversity in its business model lowers the potential risk for big downside moves.
Stellar Second Quarter
For the first time ever, Johnson & Johnson's sales overseas outpaced those in the U.S. during the second quarter, thanks partially to favorable exchange rates. Total revenue for the quarter rose 9% over last year and reached $16.5 billion. International sales were a main driver, jumping 16% to $8.24 billion, slightly above the U.S. number of $8.21 billion.
The two areas within JNJ that experienced the best growth were consumer sales, and medical equipment and diagnostics. The consumer sales numbers can be credited to strong baby, dental care and allergy drugs. The heavily advertised allergy drug Zyrtec is now available over the counter and has been able to snag 27% of the non-prescription allergy market. Medical equipment and diagnostics were led by joint replacements and diabetes and vision care items. (Want more on evaluating medical companies? Check out Measuring The Medicine Makers.)
Going Global with Baby Boomers
The second quarter earnings report is attractive, not only from the actual numbers standpoint, but more so where the growth came from. By growing the business overseas, it takes away the dependence on the U.S. consumer and diversifies the business into high growth areas. There is also the baby boomer effect on the numbers.
Bear Proof Band-Aids
Since closing at an all-time high on October 9, 2007 the Standard & Poor's 500 Index (S&P 500) has fallen 21% and is not far from a new multi-year low. During the same time frame JNJ has gained 3% and is within one big day of setting a new historic high. The performance of JNJ proves that when a bear market hits U.S. stocks, there are places to put your money, one being a diversified pharmaceutical company.
The same cannot be said for the entire drug sector. Pharmaceutical HOLDRS (AMEX: PPH) is down 17% since October 9, 2007 falling nearly as much as the S&P 500. Though within this exchange-traded fund (ETF) there are a few names that have held up fairly well. Novartis AG (NYSE: NVS) is up 8% during the same and recently closed at a new 52-week high. The similarity between Johnson & Johnson and Novartis is that they are both considered recession-proof due to their products. However, their products differ more than the average investor would assume. NVS gets 63% of its sales from prescription drugs (branded and generic), whereas JNJ is a more diversified company. (Find out how to create a portfolio that is recession proof, check out Bear-Proof Your Retirement Portfolio and Recession-Proof Your Portfolio.)
Not All Healthcare Stocks Measure Up
Do not assume just because a company is involved in the pharmaceutical or healthcare sector it will side step a bear market. As evidenced by the drop in PPH, there are a number of stocks in the sector that are suffering. Well-known drug company Merck (NYSE:MRK) is down 40% from the October 9, 2007 high. Most recently the company reported earnings without any future guidance due to poor results of a Vytorin study. Vytorin is the cholesterol drug that has been under pressure for not actually helping prevent heart issues in patients with a blood flow issue called aortic stenosis.
The problem with drug companies that rely heavily on one or two products is that they win big but they also lose big. This is why I prefer Johnson & Johnson to its peers; the diversity in its business model lowers the potential risk for big downside moves.
by
Matthew McCall
Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.
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