Johnson & Johnson (JNJ, Financial) reported its third-quarter earnings results Oct. 18. The $318 billion company delivered 2.9% sales growth to $53.78 billion and 4.4% profit growth to $12.73 billion. Johnson & Johnson closed down 2.6% that day while the broader Standard & Poor's 500 index ended up 0.62%.
“Our third-quarter results reflect the success of our new product launches and the strength of our core businesses, driven by strong growth in our Pharmaceuticals business. With a number of regulatory approvals, several new drug application submissions and new breakthrough therapy designations from the FDA, we are increasingly confident in our pipeline expectation of filing 10 new pharmaceutical products between 2015 and 2019, each with revenue potential over $1 billion. Our broad-based business model, strategic investments and talented colleagues position us well for continued leadership in health care.” – Alex Gorsky, chairman and CEO, Johnson & Johnson
(Johnson & Johnson shareholder return, annual filing)
Johnson & Johnson delivered a computed annual growth rate (CAGR) of 8.7% in the past 10 years while the broader market provided 7.3%. Despite the recent underperformance post-earnings release, Johnson & Johnson outperformed the broader index’s 6.19% with 15.86% total return year to date.
Valuations
The pharmaceutical and medical devices giant had a trailing 12-month price-earnings (P/E) ratio of 20.6 times (industry median: 26.6), price-book (P/B) ratio of 4.4 times (industry median: 3) and price-sales (P/S) ratio of 4.6 times (industry median: 2.8) (7). The company also had a trailing 12-month dividend yield of 2.66% with a 57% payout ratio and 0.10% buyback ratio.
(Johnson & Johnson, annual filing)
Johnson & Johnson
Johnson & Johnson was incorporated in 1887, 129 years ago. In its filing, the company stated that it is a holding company of more than 250 operating companies. Johnson & Johnson engages in the research and development, manufacture and sale of a broad range of products in the health care field.
Johnson & Johnson has three business segments: Consumer, Pharmaceutical and Medical Devices. Geographically, the widely diversified conglomerate receives most of its business from the U.S. (50.9% of total fiscal 2015 sales), followed by Europe (22.8%), Asia-Pacific and Africa (17.6%) and the Western Hemisphere (8.6%).
Consumer segment
(Johnson & Johnson worldwide consumer sales, earnings infographic)
The Consumer segment contributed 19.3%, or $13.5 billion, in total fiscal 2015 sales. In its filing, the Consumer segment includes a broad range of products used in the baby care, oral care, skin care, over-the-counter pharmaceutical, women’s health and wound care markets.
The segment lost 6.8% last fiscal year and 3.1% nine months into 2016. The Consumer segment also had earnings before tax margin of 13.2% in fiscal 2015.
(Johnson & Johnson Consumer segment sales, annual and quarterly filings)
Pharmaceutical segment
(Johnson & Johnson worldwide pharmaceutical sales, earnings infographic)
According to Johnson & Johnson, the Pharmaceutical segment is focused on five therapeutic areas: immunology (e.g., rheumatoid arthritis, inflammatory bowel disease and psoriasis), infectious diseases and vaccines (e.g., HIV, hepatitis, respiratory infections and tuberculosis), neuroscience (e.g., Alzheimer’s disease, mood disorders and schizophrenia), oncology (e.g., prostate cancer, hematologic malignancies and lung cancer) and cardiovascular and metabolic diseases (e.g., thrombosis and diabetes).
Immunology contributed 33.1%, or $10.4 billion, in total pharmaceutical sales. The segment also carried one of Johnson & Johnson’s most valuable drugs, Remicade®. Remicade® (infliximab) is a treatment for a number of immune-mediated inflammatory diseases. Cardiovascular and metabolic diseases contributed 20.4%, neuroscience with 19.9%, oncology with 14.9% and infectious disease with 11.6%.
The pharmaceutical segment contributed 44.9%, or $31.4 billion, in total Johnson & Johnson fiscal 2015 sales with an earnings before tax margin of 37.3% while losing 2.7% year on year. The segment grew 8% three quarters into 2016.
(Johnson & Johnson Pharmaceutical segment sales, annual and quarterly filings)
Medical devices segment
(Johnson & Johnson worldwide medical devices, earnings infographic)
The medical devices segment includes a broad range of products used in the orthopaedic, surgery, cardiovascular, diabetes care and vision care fields (5). The Orthopaedics and Surgery segments, which contributed 73.5%, or $18.5 billion in fiscal 2015 total medical sales, lost 4.7%. The corresponding segments grew 1.6%, on average, in the recent three quarters.
As a whole, the medical devices segment contributed 35.9%, or $25.1 billion, to total fiscal 2015 sales, losing 8.7% with an earnings before tax margin of 27.2%. Nine months into 2016, the segment lost 0.2%.
(Johnson & Johnson Consumer segment sales, annual and quarterly filings)
Overall, Johnson & Johnson had five-year sales and profit growth averages of 2.62% and 2.93%.
Pipeline
(Johnson & Johnson pipeline, earnings presentation)
Johnson & Johnson stated that it had five significant near-term opportunities in its pipeline, including its recently launched multiple myeloma drug, Darzalex®, in 2015.
Four other drugs that the company highlighted were Sirikumab (for rheumatoid arthritis), Guselkumab (for psoriasis), Apalutamide (for prostate cancer) and Esketamine (treatment resistant/depression/risk for suicide). (1)(2).
In addition to its pipeline, Johnson & Johnson stated that it already has a Remicade® biosimilar readiness plan. Remicade®, as mentioned earlier, contributed 9.4%, or $6.56 billion, in total sales in fiscal 2015.
Johnson & Johnson also believes it has a strong immunology portfolio beyond its top contributor drug, Remicade®. The company stated that its rheumatoid drug, Simponi Aria®, is gaining share in international markets. Its dermatology drug, Stelara®, has the market leadership in key international markets, including the No. 1 biologic in the biologic derm market. Stelara®, meanwhile, had new indications that included treatment for Crohn’s disease. Simponi® 100, for ulcerative colitis, has been growing faster than the U.S. market.
Other drugs worth mentioning and worth observing in ensuing earnings reports are Invokana® (No. 1 SGLT2 inhibitor brand and third-largest non-insulin diabetes brand globally), Xarelto® (market leading novel oral anticoagulant) and Invega Trinza® (schizophrenia medication). Lastly, Johnson & Johnson sees 40 potential line extension filings for its drugs by 2019 (3).
(Johnson & Johnson cash flow, annual filing)
Cash, debt and book value
Johnson & Johnson had about $42.58 billion in total cash and $26.56 billion in total debt with a 0.37 debt-equity ratio (8). The company also carries 34%, or $47.8 billion, of its $139.8 billion assets in goodwill and intangibles.
Johnson & Johnson had a book value of $72.47 billion having a CAGR of 5.88% when compared to its past decade figure.
Cash flow
(Johnson & Johnson cash flow, annual filing)
In fiscal 2015, Johnson & Johnson grew its cash flow from operations by 4.4% to $19.28 billion. The company also allocated $3.46 billion in capital expenditures, leaving it with $15.8 billion free cash flow.
As observed, Johnson & Johnson gains several times more of its cash flow from sales of investments ($34.1 billion in fiscal 2015) as it sets aside a good amount ($40.8 billion) toward investment purchases. Johnson & Johnson had about $22.25 billion in investments in fiscal 2015 (balance sheet) with it being classified as Level 1 (highest priority), Level 2 and Level 3 (lowest priority) (6).
In fiscal 2015, Johnson & Johnson allocated 78% of its free cash flow in shareholder payouts (dividends and buybacks). On average, the company used 88% of its free cash flow in payouts for the past three years.
Conclusion
Growth in Johnson & Johnson’s sales and profits so far this year has been consistent in comparison to its historical performance. The company also exhibited return outperformance when compared to the broader index on a long-term basis with 140 basis points for the past decade (5).
The stalwart also has been relied upon for its consistent growing dividends for the past 53 years (9).
For a giant conglomerate like Johnson & Johnson, it had a very healthy balance sheet, carrying a AAA S&P rating, and there seems to be no reason for it to lose credibility when times become tough (10).
The only concern is the upcoming Remicade biosimilars threat that has been a bit more palpable as Pfizer (PFE, Financial) would is anticipated to launch its copy late this month. Clearly, Johnson & Johnson demonstrated that it can carry on despite this threat and had several ongoing pipelines, too, to counter this assault.
Nonetheless, as a long-standing stalwart in the health care industry, Johnson & Johnson was able to sustain its commitment to shareholders, providing an acceptable return for the past decade.
In mid-July, analysts at Deutsche Bank (DB, Financial) rated Johnson & Johnson’s shares as a hold with a price target of $142 a share, from $125. UBS (UBS, Financial), on the other hand, had a buy rating on the company with a $144 target price, from $137, post-recent earnings announcement.
A 20% asking margin from the product of the company’s historical five-year earnings multiple along with its average profit growth gave me a value of about $80 a share.
In summary, Johnson & Johnson is a HOLD.
Notes
(1) Quarterly filing. DARZALEX®.
Regulatory applications for approval were submitted to the Food and Drug Administration (FDA) and European Medicines Agency (EMA) for DARZALEX® in combination with standard-of-care regimens for patients with multiple myeloma who have received at least one prior therapy.
DARZALEX® also received Breakthrough Therapy Designation from the FDA for this pending indication. The FDA also granted Breakthrough Therapy Designation to esketamine for major depressive disorders with imminent risk for suicide. Regulatory applications for approval were also submitted to the FDA for sirukumab in rheumatoid arthritis, and to EMA for a darunavir-based single tablet regimen for the treatment of HIV-1.
(2) Quarterly filing:
Sirikumab: anticipated for a 2017 launch.
Guselkumab: anticipated U.S. filing in fourth quarter.
Esketamine: phase 3 ongoing.
(3) Earnings presentation: Johnson & Johnson expects an additional $500 million in sales potential for the 40 potential line extensions.
(4) Annual filing. Consumer segment contains some of the worldwide known brands: Johnson’s®, Listerine®; Aveeno®; Clean & Clear®; Dabao™; Johnson’s® Adult; Le Petite Marseillais®; Lubriderm®; Neutrogena® and RoC®. Others were Benadryl® and Zyrtec®; Motrin® IB; Pepcid®; Stayfree®; Carefree®; Band-Aid®; and Neosporin®.
(5) Annual filing.
(6) Annual filing. Johnson & Johnson invests in the following issued instruments:
Short-term investments, government and agency securities, debt instruments, equity securities, commingled funds, insurance contracts and other assets (limited partnerships and real estate investments).
(7) GuruFocus data.
(8) GuruFocus (preliminary) data.
(9) Dividend.com.
(10) Fortune.com.
Disclosure: I am long Johnson & Johnson.
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