Who Benefits From J&J’s Recalls?
The voluntary recall of about 50 kinds of infant and children’s products might register a mere blip on Johnson & Johnson’s revenue radar, Cramer said Monday, but the new prominence of Perrigo’s products on drugstore shelves “could be a huge windfall” for the company.
In April, Johnson & Johnson’s McNeil Consumer Healthcare division willingly pulled scores of over-the-counter baby and kid’s medicines sold under some of its most well-known brands, including Tylenol, Motrin, Zyrtec and Benadryl, because of manufacturing deficiencies.
Then the Food & Drug Administration followed up with an announcement that it was expanding its probe of JNJ’s division beyond that recall. This marked the second time in 2010 and the third time in less than nine months that the McNeil segment had recalled children’s and infant’s liquid pain relief products because of problems with the company’s manufacturing practices or chemical contamination.
Now, of the $62 billion that JNJ posted in sales last year, the recalled drugs account for only $200 million to $300 million. So it’s not a big deal for this consumer goods behemoth. But when you consider that JNJ and Perrigo control 90% of the market for children’s liquids, it’s obvious Perrigo is the clear beneficiary here.
“If Perrigo can scoop up even a large fraction of JNJ’s lost sales,” Cramer said, “then that would be a big break for this company.”
Where’s the benefit for you, the investor? This huge opportunity for Perrigo hasn’t yet been priced into the stock, and that’s why Cramer thinks you should buy now.
The JNJ recall isn’t the only reason Cramer likes the stock, though. Perrigo this month bought private-label infant-formula company PBM Holdings, a move he thinks the analysts have underestimated so far. PRGO jumped to $57.20 when the deal was announced but now sits at $57.04. At that level, Cramer said, it’s a is “a total steal.”
Plus, throw in these positives: Perrigo beat the Street’s earnings estimates by 13 cents a share back on April 29. While we don’t have the numbers yet on the latest JNJ recall, we do know that store brands gained 10 share points after the adult Tylenol recall, which Cramer called “enormous.” Even when JNJ gets its affected products back on the shelves, Perrigo’s management is predicting that 50% of their new customers will stay loyal. So the company now has a great chance to take market share and keep it. And Cramer thinks that consumers in this post-crash world are much more cost conscious, making them less likely to buy JNJ’s expensive brand names.
Another great thing about Perrigo and its new acquisition, PBM: Neither has much exposure to Europe. Less than 10% of sales for both companies, in fact.
Right now Perrigo is a broken stock, not a broken company, but it’s taking Wall Street too long to figure this out.
“I want you to get into Perrigo before [Wall Street] does and the estimates go way up,” Cramer said, “taking Perrigo up with them.”
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