Summary

• Johnson & Johnson is a world leader in the health care sector, has an AAA credit rating and has raised the dividend 59 consecutive years.
• Strengths are its acquisition ability and diversity within pharmaceuticals, medical devices and consumer health products.
• Weaknesses include the never-ending demand for inventiveness and the company’s complexity, which makes it difficult for investors to study.
• Opportunities are M&A and the capability to address issues such as lung cancer from both its pharmaceutical and medical device platforms.
• Threats include strong competition, government regulation and liability lawsuits.

Johnson & Johnson (JNJ) is a world leader in the health care sector. It is one of two corporations, along with Microsoft (MSFT), with a Standard & Poor’s credit rating of AAA. JNJ has increased its dividend for 59 consecutive years. The current quarterly dividend is $1.06 per share, up 5% from $1.01.

In JNJ’s 2021 earnings call, CEO Alex Gorsky said JNJ’s Q1 results were led by strength in Pharmaceuticals and continued recovery in Medical Devices. These two groups comprise 80% of JNJ sales. The third major group is Consumer (baby care, beauty, oral care, over-the-counter drugs, and women’s health). About half of JNJ’s global sales are in the US.

Q1 Adjusted EPS of $2.59 was up 12.6% from $2.30 in Q1 2020. JNJ expects 2021 sales to grow in a range of 8.2% to 9.4% over 2020, and the company expects full year 2021 Adjusted EPS of $9.42 to $9.54 (mid-point $9.50). The chart below indicates the quarterly sales for the company’s three segments:

From Johnson & Johnson

Strengths

JNJ focuses on six pharmaceutical areas: immunology, neuroscience, oncology, cardiovascular, metabolism and pulmonary hypertension.

Three JNJ pharmaceutical products had global sales of over $4 billion in 2020, led by Stelara at $7.7 billion for psoriasis, psoriatic arthritis, Crohn’s disease and ulcerative colitis; Darzalex at $4.2 billion for multiple myeloma; and Imbruvica at $4.1 billion for certain B-cell malignancies, or blood cancers, chronic graft versus host disease and Waldenström’s Macroglobulinemia.

In the Q1 earnings call, CFO Joe Wolk said JNJ expects to file 10 new products or indications in 2021, 13 in 2022, and 26 in 2023.

In the call, Chris DelOrefice, VP for Investor Relations, reviewed the medical devices segment against Q1 2020 results, which includes interventional solutions, orthopaedics, surgery and vision. The jargon gives you a flavor of JNJ’s universe: “Hips returned to worldwide growth…. Knees declined 9.9% globally…. Spine declined 0.6%…. Advanced surgery grew 14.3%… In general surgery, wound closure grew 12% globally….”

Weaknesses

Half of JNJ’s sales come from pharmaceuticals, and this segment can never rest on past accomplishments. Currently, JNJ’s business model demands continuous invention. 

Their broad lines of global businesses are difficult for investors to understand. Communication is a daunting task in an age of quick sound bites. 

The breadth of the business reveals another weakness: When something goes wrong, it receives an inordinate amount of media coverage, such as lawsuits about JNJ baby powder or problems at the Emergent BioSystems in Maryland.

In a company as large and complex as JNJ, excellent management is a “make or break” proposition. Prior to current CEO Alex Gorsky, JNJ was widely panned and considered “dead money” by some (as was its fellow AAA company, Microsoft, before Satya Nadella). Gorsky has done a great job, but it’s important to watch the management chain.

Opportunities

In the Q1 earnings call, Gorsky said he believes orthopaedics will grow globally at a 5% rate and JNJ’s has the potential to grow its share faster than the segment. He expects 21 major medical device launches in 2021. He named QDOT MICRO (an ablation catheter) as a 2020 add-on in their Biosense Webster electrophysiology business that is already growing over 20%.

JNJ’s financial strength provides vast M&A opportunities. The August 2020 acquisition of Momenta Pharmaceuticals will help JNJ’s Janssen Pharmaceutical subsidiary to grow its leadership position in immune-mediated diseases.

Also last summer, JNJ invested in a small tele-health company, Madison Thirty, which gives it an entree into this growing segment of health delivery.

In November 2020, JNJ revealed details of its Ottava robotic surgical assistant.

In the Q1 earnings call, Gorsky described JNJ’s potential from a “lung cancer initiative” launched several years ago. Their Monarch robotic device can detect nodules. The company is working to develop the capability to deliver oncolytic agents locally. This is one example of collaboration between JNJ’s pharmaceutical and medical device platforms.

Threats

JNJ faces strong competition from other large pharmaceutical and medical device companies as well as start-up companies globally.

Pharmaceutical companies are easy targets for politicians and government regulators, even as JNJ has developed significant savvy about promoting the cost-saving aspects of their products.  

JNJ faces threats of lawsuits, such as accusations of asbestos in baby powder and its role in the production of opioids. 

Long-term Business Outlook

The pharmaceutical, medical device and consumer health businesses have strong potential for continued growth due to:

• The world’s aging population, brought about by advancements in medicine,  means that people will need increased medical support for longer lives.
• The COVID-19 pandemic reveals humanity’s vulnerability to viruses and society’s dependency on the expertise of scientists and drug manufacturers to deliver therapies and vaccines.
• Technological advancements in pharmaceuticals, robotics and microscopic products provide an ever-widening opportunity for applications within the human body.

From F.A.S.T. Graphs

Johnson & Johnson is on Margin of Safety Investing’s “Very Short List” of companies to watch. Look for further updates about Johnson & Johnson. MoSI’s current “bottom fishing” price for JNJ is $74.00. 

Disclosure: I am/we are long JNJ

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational purposes only (not a solicitation to buy or sell stocks). Ted is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for individual selection. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.