Not liking Johnson & Johnson (NYSE:JNJ) can sometimes feel tantamount to not liking apple pie or capitalism itself. True, JNJ is among the bluest of blue chips and a company with incredible staying power. And yet, the idea of investing in individual stocks is to outperform the broader markets, and JNJ is not necessarily the best option for that goal. (To help you pick stocks, check out How To Pick A Stock.)

TUTORIAL: Stock-Picking Strategies

Mediocre Q2 Results
Johnson & Johnson did not report a bad second quarter result, but nor was it an exceptionally strong quarter. Revenue rose about 8% as reported, but organic growth was a much more modest 2%. Growth was led by the pharmaceutical group where sales were up more than 5% on an organic basis. Devices were less impressive at just over 1% growth, and the consumer business was down almost 2% on an organic basis.

Profitability was a bit more problematic for the company this time around. Gross margin slipped about 40 basis points and operating income rose less than 1%. Operating margin was pressured by higher spending in both SG&A and R&D and the company delivered 6% growth in reported EPS.

The Good, Bad and Ugly
Johnson & Johnson's drug business has always been a little out of sync with dedicated rivals like Pfizer (NYSE:PFE) and Merck (NYSE:MRK), and that is actually working in the company's favor now. While many drug companies are struggling with patent expirations and lackluster late-stage pipelines, JNJ is looking at new drugs like Stelara, Simponi, and Xarelto to drive significant growth.

JNJ's device business is more problematic right now. JNJ has surrendered the field to Abbott (NYSE:ABT) and Boston Scientific (NYSE:BSX) in drug-coated stents, but growth plans in areas like endovascular and electrophysiology may be more complicated by competition from the likes of St. Jude (NYSE:STJ) and BSX than company management wants to acknowledge. Elsewhere, the results in orthopedics from JNJ and Biomet suggest the market is still not very good, and that's a cautious sign for the likes of Zimmer (NYSE:ZMH) and its upcoming earnings.

On a more positive note, JNJ is doing pretty well in surgery, diabetes and diagnostics. Watch upcoming earnings from companies like Covidien (NYSE:COV), Abbott, Medtronic (NYSE:MDT), and Danaher (NYSE:DHR), though, to see how much of this is market growth and how much is competitive take-away. (To help you determine if Johnson & Johnson is succeeding or if the industry is instead growing, read Great Company Or Growing Industry?)

What's Next For This Giant?
With the Synthes deal still to close, it would seem reasonable to assume that JNJ will simply focus on internal operations, and given the ongoing problems in the consumer business, that may be a wise idea. On the other hand, JNJ has been a very active acquirer over the years and that seems unlikely to change, as acquired growth can quiet the shareholder complaints about stagnant growth profile. In particular, JNJ may do well to consider acquisitions in emerging markets, particularly in the growing over-the-counter segments where JNJ is already quite strong domestically.

The Bottom Line
As a reliable dividend payer, JNJ is not a terrible idea for conservative or dividend-oriented platforms. By the same token, names like Covidien, Stryker (NYSE:SYK), and Abbott deserve every bit as much consideration at today's prices. (For more on dividend-yielding assets, see Build A Dividend Portfolio That Grows With You.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Filed Under:
Tickers in this Article: JNJ, PFE, ABT, BSX, STJ, COV, MDT

comments powered by Disqus

Trading Center