Why J&J's headache won't go away

[biaggio]

I am starting to look at JNJ in more detail.

 

Came across this interesting article at http://money.cnn.com/2010/08/18/news/companies/jnj_drug_recalls.fortune/index.htm

 

Do folks think that items noted in article is priced into the price of JNJ.

 

My initial impression is that it is selling below fair value. Obviously a lot of smart people feel that price is attractive.

[txlaw]

I am starting to look at JNJ in more detail.

 

Came across this interesting article at http://money.cnn.com/2010/08/18/news/companies/jnj_drug_recalls.fortune/index.htm

 

Do folks think that items noted in article is priced into the price of JNJ.

 

My initial impression is that it is selling below fair value. Obviously a lot of smart people feel that price is attractive.

 

This is a serious issue for JNJ, but I think there is a high probability that they will make things right.  You can bet that Buffett will have something to say about it behind the scenes if they don't take appropriate action.

 

I don't own JNJ for my own account, but I'm planning on buying some for my parents' account.

[vinod1]

I think the way to think about this is to ask yourself "Is this problem is solvable?"

 

Vinod

[RRJ]

Yes, is the problem solvable (I think it is, and they are already attacking that, as they have other problems in the past).  And two, will this have a lasting negative impact on the brand.  This one is a little harder, but JNJ knows the lesson -- take the hit, spend the money, and turn lemons into lemonade by actually using this to increase the public's confidence in their products in the long term. 

 

Likely to end up a replay of the Tylenol scare of the 1980s, which solidified JNJ's quality in the public's mind. 

 

At least that's what I hope will happen.  I think they are smart enough and long-term thinking enough to pull that off. 

[Uccmal]

Here is what I see with JNJ:

 

Pluses:

- Lots of cash to do what they want with including acquisitions as needed to add drugs

- Can borrow money at rates that are beyond cheap - 2.9% for 10 years

- Products that you dont even know you are using - take a look through a lady's supplies one day and you will find several JNJ products (dont get caught or at least ask permission first)

- I still buy their childrens products for the baby even though there has been a recall.

- low corporate debt

- Diversification across product lines - less dependent on single blockbuster drugs such as Pfizer

- Demographics and first past the post - they already exist and have supply lines and product distribution channels in place - hard to compete with.

- R&D - article refers to nano-drugs.

- dividends - refer to minuses

 

minuses - next post

 

[Uccmal]

Minuses:

- Very large company - depressed market cap of 172 B - Where do you go from here - at a certain point it is best to pay a large portion of their cash out as dividends rather than aiming for market cap growth. 

- present management appears to have lost control - probably time to drive out the CEO and the QA/QC lady who is taking the fall - He should have been at the hearings - This is immently fixable in my opinion - HD has effectively done it.

- company appears to have gotten sloppy - because there were no deaths they are trying to excuse it.

- Large size seems to necessitate the need for purchases of larger outside entities in order to expand.  I find this process to be dubious - Better to contract out certain things and buy in specific products.

- Company needs to be decentralized again - each operating division needs to be responsible for their own product lines with their own brands.

 

 

I guess it boils down to whether I will still buy their products and the answer is yes,  unless I see more reasons otherwise.

 

I do own the stock and have been buying at this price.  Certainly not a Graham play but I have set up a certain amount of my holdings to generate cash and protect me from a market crash as much as one can.

 

 

 

 

 

[biaggio]

Agree with above.

 

Will turn current problem around and turn lemon into lemonade.

 

I am getting a fair value of $65/share. Am I in the right ballpark?

 

I like the dividend + love the consumer products but is it selling with enough MOS.

[Viking]

the fact this was Buffett's only large recent purchase tells me all I need to know about current valuation (as I have said in the past holding this co is perhaps a better option than holding bonds). The fact that it is a large FFH holding further confirms to me that it is a solid long term bet.

 

Having said all this my current favourite big pharma play is ABT. They are similar to J&J, but they are smaller and look to have a much higher growth rate (looking out 3 to 5 years). My guess is J&J will grow earnings 7-8% and ABT will grow earnings 10-12%. Both are trading today at similar PE's (around 12).   

[biaggio]

Thanks Viking,

 

Agree re Buffett holding it as one of his larger holdings (as well as Prem, no?) is a good validation.

 

Seems like ABT would have a larger MOS. I will have a look at that.

 

Looking to develop more my shopping list in case Canadian $$  strengthens to par.

[biaggio]

Johnson & Johnson recalls contact lenses overseas

 

http://www.usatoday.com/money/industries/health/2010-08-23-jnj-recall_N.htm

 

Health giant Johnson & Johnson has issued its ninth recall of a consumer health product in a year, this time covering millions of 1 Day Acuvue contact lenses sold in Japan and several other countries in Asia and in Europe

[biaggio]

DePuy Orthopaedics Voluntarily Recalls ASR Hip System

http://finance.yahoo.com/news/DePuy-Orthopaedics-prnews-3916371134.html?x=0&.v=1

 

?another recall

 

I am thinking J& J reviewing all their operations

 

I am surprised Mr Market is not giving us a better price. I am thinking this is a good sign. i.e. all the sellers have sold

[Uccmal]

Biaggio, I think you need to keep in mind that recalls and litigation are staples in this industry.  JNJ dedicates several pages of each AR to discuss litigation. 

 

I also think you are correct about the review of operations.  There may be more to come as they identify defects in the manufacturing process. 

 

BTW:  I have a smallish position in JNJ relative to some of my other positions.  I like the dividend and the price but not enough to back the truck up. 

 

Al.