Now is it time to start buying Johnson & Johnson (JNJ)?
Shares in healthcare giant Johnson & Johnson have been under pressure since hitting a high of $186.69 in late April. Those stocks closed Friday night at $168.18, down 9.3% from that top. The news has been constant. A constant beat of negativity cares about you.
From the US government announcing its intention to stop its Covid-19 vaccine purchases (not that the JNJ wasn’t prepared for that) to the company’s announcement that it would no longer sell baby powder globally, to the Biden administration’s new law allowing negotiation from some drug prices (another item that won’t shake JNJ), to this morning’s news…
Apparently, JNJ will employ the strategy used in Texas and other states as well, to create a subsidiary to hold all of the company’s talc-related liabilities and then place that subsidiary into bankruptcy protection. Do not like? It preserves the equity valuation.
Back in July…
Johnson & Johnson released the company’s second-quarter earnings. The company printed an adjusted EPS of $2.59 on revenue of $24.02 billion. These numbers beat expectations on the upper and lower lines. The revenue impression was good enough for year-over-year growth of 3%, or 8.1% on an adjusted operating sales basis. Regardless, JNJ beat Wall Street. Globally, these sales figures were negatively impacted by 5% related to the exchange rate.
Overall, it was a solid quarter. The Pharmaceuticals and Consumer Health segments outperformed Wall Street, while the MedTech segment slightly underperformed. The guidance, however, was silenced.
For the full year, JNJ maintained guidance of $97.3 billion to $98.3 billion for operating sales, which would result in adjusted operating sales growth of 6.5% to 7.5%. JNJ reduced its estimate of “reported” sales to $93.3 billion – $94.3 billion due to a negative exchange rate impact. JNJ lowered its pre-tax adjusted operating margin outlook to stable from a year ago, from a previously driven improvement to a 50 basis point improvement. As far as earnings go, JNJ now sees a full-year adjusted EPS of between $10.65 and $10.75, which has reduced the range by a nickel at each end without affecting the midpoint.
Do not forget !!
In November of last year, Johnson & Johnson announced its intention to separate its consumer division within 18 to 24 months, creating two companies. Without going into specifics, the move would allow JNJ to focus more on higher-margin pharmaceutical businesses, while slower-growing, consumer-focused businesses could focus on cutting-edge products centered on wellness and personal health. It seems far away, but if the split is on schedule, it’s now less than 9-15 months away.
At the end of that July quarter, JNJ had a net cash position of $32.568 billion, which was higher than previous quarters courtesy of free cash flow that reached $1.79 per share, which was a three-quarter high and the second largest per share free cash flow print for the company at six. Inventories reached US$ 11.437 billion, dragging current assets to US$ 63.847 billion. Current liabilities, which are flat, were printed at $44.821 billion, putting the company’s current ratio at 1.42, which is healthy and up from 1.39 in the previous quarter. Excluding inventories, the company’s rapid index comes to 1.17. This is also a healthy number.
Total assets add up to $177.724 billion, including “goodwill” and other intangibles of $76.574 billion, which at 43.1% of total assets is a little too much for my taste. Total liabilities minus equity totals $101.367 billion, including $28.292 billion in long-term debt. This is a pretty strong swing. On the positive side, the company could, if it needed to, pay all of its debt out of pocket.
On the other hand, total assets minus intangible assets have a nominal value slightly lower than total liabilities. I don’t love it. At the end of the quarter, the company’s tangible book value reached $0.08 per share. While I cannot endorse this line with a minus sign in front, this was the closest JNJ has come to a tangible positive book value per share since the cows came home (2017).
I really think the ball (stock) is starting to roll in the right direction. The fundamentals are improving. The balance isn’t bad. The stock trades at a 16 times undervalued profit while paying shareholders a staggering $4.52 annually just to hang around. That’s good for a 2.55% yield. (Note that the stock is trading ex-div, payable September 6 today.)
Furthermore, the company appears to be as well managed under CEO Joaquin Duato as it is under current executive chairman Alex Gorsky. I really like the idea of owning the shares (you have time) before splitting into two companies.
My view is that JNJ presents itself as a defensive-type income-paying stock that is likely to be bought in broader market weakness as we move into a period of heightened uncertainty. My plan is to start on the stock’s specific weakness. That could very well happen this morning. In a perfect world, I would like to add the 61.8% Fibonacci retracement level from the December-April rally and then aggressively add to the well-established $153 support level.
As I wait for my price, I see that the JNJ$165 puts from 16th Sept are trading around $1.75 and the JNJ$155 puts from 18th Nov are priced at approximately $1.95. This has my attention. You might consider making a sale and getting paid to wait for my bid.
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