Johnson & Johnson (JNJ): Is This Healthcare Company a Strong Investment?

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The slowdown in stock market has also adversely affected leading healthcare companies’ stocks. But many still think investing in healthcare giants such as Johnson & Johnson (NYSE:JNJ) is the right move. Let’s take a closer look at this company and break down its main strong points, opportunities, and risks.

Johnson & Johnson (NYSE:JNJ)

J&J continues to grow

Johnson & Johnson has done well in the first quarter of 2013: The company’s revenues grew by more than 8.5%. In comparison, other leading healthcare companies such as Eli Lilly & Co. (NYSE:LLY) and The Procter & Gamble Company (NYSE:PG) haven’t done as well: Revenues of Eli Lilly remained flat in the first quarter of 2013; Procter & Gamble’s net sales increased by only 2% (year-over-year). On the other hand, Johnson & Johnson (NYSE:JNJ)’s operating margin declined by 15.5%. The sharp drop in profit margin is related to the one time beneficial adjustments that were recorded in the first quarter of 2012. After controlling for this one-time accounting provision, the company’s profitability declined by only 4.4%. Johnson & Johnson’s profit margin used to be much higher than that of Procter & Gamble and Eli Lilly in most of 2012. In the past couple of quarters, however, J&J’s profit margin slipped while other companies’ profit margin rose. In the chart below are the developments in adjusted profit margins of the above-mentioned companies (adjusted for one-time accounting expenses such as goodwill).

As seen, the profitability of Johnson & Johnson (NYSE:JNJ) is in the middle of the pack among these healthcare and consumer goods companies.

As indicated in the table below, among the three major business segments J&J operates, both the medical devices and pharmaceutical segments have sharply increased in the first quarter of 2013. The company’s consumer goods segment rose by only 3.3%.

For the consumer segment, the high competition and slow progress of the U.S economy is likely to impede this segment’s growth.

Despite the rise revenues across all three segments, the fluctuations in the currencies have adversely affected revenues. The high movement in the forex markets could keep pulling down the growth rate in revenues in the coming quarters.

What about future growth?

J&J is well diversified and reaches many business segments as presented in the table above. The consumer segment depends on the future progress of the global economy mainly the U.S, which accounts for nearly a third of Johnson & Johnson (NYSE:JNJ)’s revenues in this segment. If the U.S economy’s growth slows down; it could impede growth in consumer sales. Alas, this segment has the lowest profit margin and accounts for the lowest share of J&J’s total revenues.

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