Note from Daily Trade Alert: The following article first appeared in The Growth Stock Advisor, a premium newsletter offered by Investors Alley.
Can you name the largest—and most diverse—medical company on Earth?
Making everything from pain killers to cancer drugs to medical devices to mouthwash, it is Johnson & Johnson (JNJ). Founded in 1886, the company has evolved into a global healthcare giant that serves more than one billion people daily.
Johnson & Johnson operates across three distinct healthcare businesses: pharmaceuticals, medical devices and consumer health. About 70% of its sales come from markets in which it is either the number-one or number-two player. And 16 of the products and platforms owned by the company make more than $1 billion in sales each year. An additional 12 products account for more than $2 billion in sales.
Slow and Steady J&J
The management at Johnson & Johnson prefers to be the tortoise than the hare. But, still, it’s a very large tortoise.
Johnson & Johnson’s sales momentum has been slow and steady rather than racing ahead in fits and starts. The company has averaged a compound annual growth rate (CAGR) of just 3% over the past decade. But to put that into context, J&J’s revenues last year came in at a massive $82.6 billion.
I like the fact that its growth over the years has been spread across different geographic regions and product categories. While roughly half of sales do come from the U.S., the company notes, it “conducts business in virtually all countries of the world.”
Johnson & Johnson’s pharmaceuticals division is its largest, accounting for 55% of all sales. Within pharma, its medicine cabinet is diversified across six separate therapeutic areas and multiple drugs.
J&J’s main pharma area by sales is immunology, including the treatment of autoimmune diseases such as rheumatoid arthritis and psoriasis. These conditions typically stem from the body overreacting to infection or attacking its own cells and organs by mistake. This is a sector worth $80 billion, according to some estimates, and the company reported $15 billion in immunology sales last year alone. This was given a big boost by a $7.7 billion in sales of Stelara, a drug used to help patients with various inflammatory conditions.
Another big revenue generator is oncology. Revenues there came in at $12.4 billion last year, propelled by sales of the drug Darzalex for the treatment of multiple myeloma.
Beyond immunology and cancer-related ailments, Johnson & Johnson’s pharmaceutical expertise includes neuroscience; infectious diseases such as AIDS; cardiovascular and metabolic illnesses; and pulmonary hypertension.
Johnson & Johnson’s other divisions are also money makers. Its medical devices division accounts for another 28% of total sales. Its consumer health goods division (think Tylenol) makes up the remainder.
Breaching the Moat?
As strong as the company is, J&J does not have a Warren Buffet-like moat around it. It does face two main hurdles.
The first is expiring patents on some of its medicines, for example, the immunology therapy Remicade. When patents for the drug (J&J’s second-largest product by sales) expired, biosimilar versions of the treatment hit the U.S. market after 2016. Annual Remicade sales have dropped from $7.0 billion five years ago to $3.7 billion in 2020.
And of course, there are the lawsuits, such as those for its baby powder product. In the company’s 2020 annual report, Johnson & Johnson cited a litigation expense of $3.9 billion associated with talc-related reserves/settlements.
Finally, there was the pandemic. The company’s medical device business, which supplies products used in the orthopedic, surgery, and eye health fields (including Acuvue contact lenses), was hit. The postponement of elective procedures during the pandemic in 2020 caused sales for the division to slip by more than a tenth, to $23 billion.
What the Future Holds
The pandemic, however, also brought success. In February, the FDA granted emergency use authorization (EUA) for Johnson & Johnson’s coronavirus vaccine. This is the first such vaccine approved that only requires a single dose. J&J aims to deliver 100 million single-shot vaccines to the U.S. by the end of June.
Johnson & Johnson’s vaccine work has highlighted the skill and expertise of the scientists the company employs. Such capabilities have been garnered through the company’s extensive investment in research and development (R&D). That investment is why a quarter of Johnson & Johnson’s annual sales now stem from products that debuted in the last half decade.
It is these capabilities that will help Johnson & Johnson defend its leading market positions. Maintaining its strength, the company spent a huge $12 billion on R&D last year—equivalent to 15% of its sales. And it has invested more than 12% of its revenues on R&D in each of the last five years.
I expect the good times to continue to roll for J&J investors. Shares have risen 25% over the past 12 months, notwithstanding the pandemic. And they are up almost 50% over the past five years, bringing the company’s total value to about $425 billion.
Johnson & Johnson’s forward price/earnings multiple of 15 times looks reasonable to me, and dividend investors are smiling too. J&J has raised its dividend every year for almost six decades! That’s makes it a true star on the S&P 500’s Dividend Aristocrat list.
J&J’s higher dividend payout trend will continue. It is underpinned by very strong cash generation. The company’s free cash flow rose from $16.1 billion in 2015 to a record $20 billion in 2020, of which roughly half was returned to investors.
I will give Johnson & Johnson a 4-star rating. I love the steady growth path it is on. But lawsuits and patent expirations remain a risk. You can buy the shares at any price up to $185 a share.
— Tony Daltorio
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Source: The Growth Stock Advisor