James Barrow (Trades, Portfolio) is executive director of Dallas-based investment firm Barrow, Hanley, Mewhinney & Strauss, the lead portfolio manager for the Vanguard Windsor II and Selected Value Funds. For the 10-year period ended 3/31/2010, the Selected Value Funds averaged 9.33% a year, while the market had negative returns. The firm invests in equities with below-market price-to-earnings ratios, below-market price-to-book ratios, and above-market dividend yields.
Last quarter, James Barrow (Trades, Portfolio) increased his position in Johnson and Johnson (JNJ, Financial) buying 184,976 shares. As of March 31, 2015, he was holding 15,676,362 shares of the company. The following chart shows his holding history in the company.
Last month, Johnson & Johnson reported sales of $17.4 billion for the first quarter of 2015, a decrease of 4.1% as compared to the first quarter of 2014. Adjusted EPS for the first quarter was $1.56, a decrease of 4.3% year over year. The major culprit that affected results was currency headwinds, which negatively impacted sales by 7.2%.
Operational performance was solid and the company’s sales in constant currency increased 3.1%. Domestic sales increased 5.9% while international sales (ex-forex) were up 0.8%. Excluding the net impact of acquisitions and divestitures, on an operational basis, worldwide sales increased 5.7%, domestic sales increased 9.1% and international sales increased 3.0%.
Commenting on the results, the company’s Chairman and Chief Executive Officer Alex Gorsky said:
"The company delivered strong underlying growth in the first quarter driven by new products and the strength of the core business. Of note is the continued robust growth of the Pharmaceutical business and the solid performance of our Consumer brands."
The company slightly lowered its adjusted earnings guidance for full-year 2015 to $6.04 - $6.19 per share reflecting negative foreign currency movements.
Despite of these negative results and guidance announcements, I believe Johnson & Johnson’s long term growth story remains intact. The company’s underlying performance remains solid and long term value investors should buy the stock.
Johnson & Johnson has delivered 31 consecutive years of adjusted earnings increases, and 52 consecutive years of dividend increases to its shareholders. Its products are industry and segment-leading with 70% of its sales coming from the products with number one or number two market share position, and 25% of sales coming from products it has launched in the past five years. The company also has a very good record in terms of returning cash to shareholders. Johnson and Johnson has returned about 70% of its free cash flow over the past decade, which amounts to about $90 billion.
Going forward, the company is set to benefit from healthcare reform efforts and improving economies which are helping more people access affordable quality care. The governments across the world are increasingly recognizing the need of continued innovation to address healthcare needs and are taking steps to reward innovation through FDA and EMEA designations that are helping to speed product review times. Johnson & Johnson with its deep product pipeline across the entire enterprise will benefit from this trend.
The company's pharmaceutical divison has launched 14 new products since 2009, driving cumulative sales of over $27 billion. This trend is expected to continue going forward and management believes that Johnson and Johnson's drug pipeline is poised to yield 10 potential new product filings between 2013 and 2017. Similarly, the company's medical divison has launched 50 major products since 2012 and have more than 30 new filings pending as of the end of the last year. This divison is also benefiting from growth in the emerging markets where it is capitalizing on the scale, depth and breadth of the portfolio the company can offer to governments and large healthcare systems. The company grew sales in China by nearly 15% on an operational basis last year.
Johnson & Johnson is trading at 15.55x its FY2016 EPS. The company's EPS has grown from $3.86 in fiscal 2012 to $5.70 in fiscal 2014. It is expected to grow another 9% in fiscal 2015. The company has a dividend yield of 2.80% and a payout ratio of 48%. I believe the stock is a good buy at the current levels.
