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Johnson And Johnson Resilient Despite Recalls
It's no secret that consumer products giant Johnson and Johnson (NYSE:JNJ) has been embarrassed this year by what seems to be a consistent flow of product recalls for nonprescription medicines, including household names like Tylenol and Motrin. In fact, the string of product recalls led to a 40% dive in nonprescription drug sales in third quarter.
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Putting the Past in the Past
The company's consumer division which produces products like Tylenol and Band-Aids has announced 10 product recalls in the past year. Add in the recession of 2008-2009 and the current state of the economy, and the result was a 25% drop in sales in the consumer division, principally as a result of product recalls. In fact, this quarter appears to be one of the worst in the history of the Johnson and Johnson company. In the US, all divisions experienced a total sales decline of 2.5%, while total sales in Europe were down by 6.4%. Overall company sales were down by 1%, however, as the company benefited from growth in emerging markets like Latin America and Asia. Due to corporate divestitures and favorable tax issues, EPS was $1.23 up from $1.20 in the year ago quarter. Analysts were expecting JNJ to earn $1.15 a share.
A Resilient Titan
Despite 10 product recalls JNJ managed to deliver revenues of $14.98 billion versus $15.08 billion a year ago. When you consider the effect that product recalls have had on a company like Boston Scientific (NYSE:BSX), you start to appreciate the competitive advantages embedded in JNJ. The lack of interest in the shares due to product recalls have left the company trading at under 13 times forward earnings and yielding 3.4%. In fact JNJ has been a lagging performer so far in 2010 relative to the overall S&P, thus offering a chance to add a blue chip name at an attractive price.
Johnson and Johnson has dealt with recalls before and it will handle today's recalls as well. In the meantime the yield along with a 5% to 7% appreciation in shares would result in a very satisfactory return for most investors going forward. Other standout blue chips like Caterpillar (NYSE:CAT) and Deere (NYSE:DE) have been on a tear this year and are valued at 33 and 27 times earnings respectively. For all its inherent qualities, qualities which are being masked by today's recalls, Johnson and Johnson is being ignored today.
Bottom Line
Despite a bad quarter for Johnson and Johnson, the actual results display the long term competitive advantages of this company - that is why investors may come back to this stock soon enough. (To learn more, check out our Guide To Investing In Consumer Staples.)
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IN PICTURES: 5 "New" Rules For Safe Investing
Putting the Past in the Past
The company's consumer division which produces products like Tylenol and Band-Aids has announced 10 product recalls in the past year. Add in the recession of 2008-2009 and the current state of the economy, and the result was a 25% drop in sales in the consumer division, principally as a result of product recalls. In fact, this quarter appears to be one of the worst in the history of the Johnson and Johnson company. In the US, all divisions experienced a total sales decline of 2.5%, while total sales in Europe were down by 6.4%. Overall company sales were down by 1%, however, as the company benefited from growth in emerging markets like Latin America and Asia. Due to corporate divestitures and favorable tax issues, EPS was $1.23 up from $1.20 in the year ago quarter. Analysts were expecting JNJ to earn $1.15 a share.
Despite 10 product recalls JNJ managed to deliver revenues of $14.98 billion versus $15.08 billion a year ago. When you consider the effect that product recalls have had on a company like Boston Scientific (NYSE:BSX), you start to appreciate the competitive advantages embedded in JNJ. The lack of interest in the shares due to product recalls have left the company trading at under 13 times forward earnings and yielding 3.4%. In fact JNJ has been a lagging performer so far in 2010 relative to the overall S&P, thus offering a chance to add a blue chip name at an attractive price.
Johnson and Johnson has dealt with recalls before and it will handle today's recalls as well. In the meantime the yield along with a 5% to 7% appreciation in shares would result in a very satisfactory return for most investors going forward. Other standout blue chips like Caterpillar (NYSE:CAT) and Deere (NYSE:DE) have been on a tear this year and are valued at 33 and 27 times earnings respectively. For all its inherent qualities, qualities which are being masked by today's recalls, Johnson and Johnson is being ignored today.
Bottom Line
Despite a bad quarter for Johnson and Johnson, the actual results display the long term competitive advantages of this company - that is why investors may come back to this stock soon enough. (To learn more, check out our Guide To Investing In Consumer Staples.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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