"Johnson & Johnson (NYSE: JNJ) has vast holdings, but its strategy is simple: Support a deep pipeline of new drugs and medical devices with an aggressive acquisition strategy and cost controls," notes blue chip investor Richard Moroney.
In his Dow Theory Forecasts, he adds, "And despite the recession, J&J has kept its financial footing, remaining one of the few companies with the top credit rating of AAA." Here's his long term outlook.
"This year the U.S. pharmaceutical market is expected to contract for the first time in 50 years as fewer people visit doctors or start new therapies for chronic conditions.
"Beyond 2009, an economic recovery should reinvigorate J&J, though it is too early to determine whether health-care reform will help or harm the company.
"J&J's pharmaceutical segment (38% of revenue) has seen sales fall nearly 9% over the past year. In addition to recessionary forces, generic competition has weighed on the segment.
"The patent on epilepsy drug Topamax expired in March, and J&J lost exclusivity for its Risperdal antipsychotic in June 2008.
"Several experimental drugs have the potential to rejuvenate J&J's portfolio. Analysts expect up to seven new drugs from the pipeline to begin contributing to revenue this year.
"Stelara for severe plaque psoriasis and Simponi for rheumatoid arthritis have already gained regulatory approval outside of the U.S. and are under review by the U.S. FDA.
"Meanwhile, since November, J&J has completed three takeovers for more than $2.2 billion and agreed to invest another $1.5 billion in Elan's Alzheimer's portfolio.
"As part of its investment in Elan, J&J gained an option that could allow it to acquire Biogen Idec's 50% stake in Tysabri, a blockbuster drug for multiple sclerosis, if Biogen is acquired.
"J&J's other two segments -- medical devices and consumer products -- have treaded water in the past 12 months, delivering roughly flat sales. And consensus estimates project roughly flat per-share profits in the second half of 2009.
"J&J's stock price already reflects Wall Street's modest expectations. Shares trade at 13 times trailing earnings, a 23% discount to the five-year average P/E ratio.
"The stock's price also looks appealing relative to trailing sales (21% below the five-year average), cash flow (26%), and book value (18%). We rate the stock -- which is on our focus list -- a long-term buy."
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