Johnson & Johnson Remains Too Big to Succeed

Johnson & Johnson
Johnson & Johnson

Few stock sectors are as reliable as drugs and health care, and astute investors know that companies such as Merck, Pfizer, and Abbott Laboratories have delivered healthy returns over the years.

One stock that investors have become less enamored with, however, is Johnson & Johnson.

The company has made recent mistakes, including product recalls, and its stock performance has been uninspiring for the most part.

Johnson & Johnson’s first quarter was not so healthy, even though its numbers beat analysts’ estimates. Revenue was $16.1 billion, down slightly from the same quarter a year before. Earnings were $3.8 billion, or $1.37 a share, up 1.5 percent from a year before.

But the headline numbers obscured some disappointing details. Revenue from the U.S. declined by 5.1 percent. The only unit that showed growth was business pharmaceutical sales, while consumer sales and medical devices declined by 2.4 percent and 0.3 percent, respectively.

Also disappointing was that management offered full-year earnings per share guidance of a conservative $5.07 to $5.17. This failed to dispel concerns about litigation costs related to Johnson & Johnson’s DePuy medical device unit.

Johnson & Johnson seems to have taken a “we know best” attitude when it comes to Wall Street’s wish that it break itself into smaller and — it is hoped — more valuable parts.

Management’s insistence on keeping the company one large conglomerate could make it lose loyal investors.

In fact, this insistence is remarkable when rivals Pfizer and Abbott Laboratories have enjoyed positive results from opting to separate their businesses.

Although I’d like to give Johnson & Johnson the benefit of the doubt on this issue because it’s been in business so long, the company has yet to prove that it can make a solid turnaround as long as it stays “too big to succeed.”

Bottom Line

As dominant as Johnson & Johnson has been over the past several decades, it has stumbled repeatedly over the past five years. Although Johnson & Johnson’s shares are slightly less expensive than Pfizer’s, its growth doesn’t support its having a higher price-to-earnings multiple than Novartis or Covidien.

—By Richard Saintvilus, Contributor,

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