Johnson & Johnson JNJ is one of the few companies whose stock price has almost fully recovered after the recent market crash caused by the Covid-19 pandemic and subsequent containment measures.
The company recently released a strong quarterly result, along with revised guidance indicating a slight drop in the management’s forecasted revenues for 2020, largely caused by a slowdown in its medical devices segment.
According to the earnings report, Johnson & Johnson is well on track to releasing its Covid-19 vaccine by the first quarter of 2021 (a non-profit venture), and the management also announced another dividend hike.
Company overview
Johnson & Johnson is one of the world's largest and most diversified healthcare companies. Based in New Brunswick, New Jersey, it is one of the oldest healthcare companies in the world, founded way back in 1887. Today, the company operates through three core divisions: pharmaceutical, medical devices and diagnostics and consumer products.
The pharma segment focuses on various therapeutic areas such as immunology, infectious diseases, neuroscience, oncology, cardiovascular and metabolic diseases, whereas the medical devices segment deals in products used in the orthopedic, surgery, cardiovascular, diabetes care and vision care fields. These two segments together account for nearly 80% of the total revenues of Johnson & Johnson and are strong cash cow businesses.
The consumer products side of the business is also strong and provides a wide range of products used in baby care, oral care, skincare, over-the-counter pharmaceutical, women's health and wound care. The company has a strong brand portfolio with respect to its consumer business that includes the likes of Neosporin, Stayfree, Carefree, Benadryl, Aveeno, Neutrogena, Clear & Clear, Pepcid and many more. The company employs a workforce of close to 132,200 people and is one of the most diversified healthcare giants in the world.
Solid quarterly results
Johnson & Johnson reported solid results for the first quarter of 2020. The company reported a top-line of $20.69 billion in revenue, which was well above the analyst consensus estimate of $19.83 billion and a significant improvement over the $20.02 billion reported in the corresponding quarter of the previous year. If we exclude adjustments for acquisitions and divestitures, the company's like-for-like operations saw a jump of 5.6% in the top-line.
Both the pharma segment and the consumer segment managed to show double-digit growth of 10.1% and 11.3% respectively. The company faced a slow performance in its medical devices segment, which is expected to continue given the fact that hospitals all over the world are canceling non-essential procedures to increase the capacity for coronavirus patients. This is causing a drop in medical device demand.
On the earnings front, the company reported earnings per share of $2.30, which was well above the analyst consensus estimate of $2.02 and an improvement over the $2.10 reported in Q1 2019.
Limited disruptions
The impact of the lockdown is expected to be minimal on the pharma and consumer segments. In fact, the management is running its Tylenol manufacturing facility round the clock to ensure maximum supply. The company has refocused the manufacturing lines to make the easiest-to-produce pills, which are the white Tylenol caplets, to increase production and throughput. The demand for its medical devices might be slower, but the growth in the pharma and consumer segments will largely offset this drop.
The good part is that almost 50% of the company’s workforce is slowly getting back to work, especially in China. Thus, the overall impact of the Covid-19 is not expected to be too bad on the company.
Stock price and dividend
The above chart shows how Johnson & Johnson’s stock has shown a sharp drop and recovery in the past month. It is worth noting that the company has had a history of paying solid dividends and has increased dividend payouts for 58 consecutive years, which is truly remarkable. Even in its quarterly result delivered last week for Q1 2020, the management inspired investor confidence through yet another dividend hike. The company’s payout ratio is about half of the cash flows, and it has an Ebitda-to-operating-cash-flow conversion rate of more than 95%, which is truly phenomenal.
Key takeaways
Johnson & Johnson might witness a slight dip in its top-line and profitability for 2020, but the management has provided good foreseeability regarding its future. This is the reason why the stock price has recovered so rapidly after the crash.
Johnson & Johnson has continued hiking dividends and is making remarkable progress with respect to the development of the Covid-19 vaccine. It is one of the few global pharma giants that have the ability to produce the vaccine on a mass scale from 2021 onwards. Overall, I believe Johnson & Johnson is an excellent blue-chip healthcare investment.
Disclosure: No positions.
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