Can Johnson & Johnson (JNJ) Hold Its Momentum? – Pfizer Inc. (PFE), Covidien plc (COV)

Shares of Johnson & Johnson (NYSE:JNJ) have climbed 16% over the past five months and as of this writing, the stock is making new 52-week highs. The health care giant appears rejuvenated, much of which can be dated back to when Johnson & Johnson (NYSE:JNJ) completed its acquisition of Synthes. But this deal hasn’t completely eradicated concerns about the company’s long term prospects, and more specifically, that J&J is sometimes considered “too big.”

Likewise, although the company recently posted good fiscal fourth-quarter results, there were also some opportunities for improvement. Consequently, it’s become progressively more difficult to consider shares of Johnson & Johnson (NYSE:JNJ) a better value over rivals such as Pfizer Inc. (NYSE:PFE) and Covidien plc (NYSE:COV). J&J has to prove that it can maintain its momentum and/or improve in some key areas to calm investors’ nerves.

Doing much better, but…
The company has nursed its medical device business back to better health. However, it hasn’t been easy, given the rash of product recalls that has affected the company by as much as $3 billion in charges for a faulty hip replacement device. However, with the recent beat on revenue estimates, there are signs that better days might be ahead.

Despite another special charge related to the hips device, the company posted an 8% increase in global revenue for the fourth quarter, which was fueled by rebounding sales of prescription drugs and demand for its medical devices. It’s worth noting here, however, that the strong 13.7% growth in medical devices was boosted by the impact of the Synthes acquisition. When excluding Synthes, sales were up roughly 1%, including a 2.2% decline in the U.S.

Is J&J truly back to growth?
Bears would argue that Johnson & Johnson (NYSE:JNJ) is not truly back to “organic” growth, given the recent boosts from Synthes. Still, the company deserves credit for seeing a growth opportunity in Synthes that it otherwise might never have had. Today, the Synthes acquisition has bolstered Johnson & Johnson’s position as a dominant player in orthopedic devices for trauma patients . Likewise, Synthes was able to strengthen J&J’s overall orthopedic and spinal care businesses, which are now contributing to the bottom line. It’s also important to note that the reported numbers were good, but far from breathtaking — at least not from an operational perspective.

Although J&J showed some progress, Q4 gross margin declined roughly 135 basis points. This comes on the heels of a 100 basis-point decline in Q3. Management did say, however, that the impact to margins was due to an inventory step-up charge related to Synthes, which increased the cost of goods sold by 140 basis points. The step-up charge has been treated as a special item. But even on an adjusted basis, the margin was still unimpressive considering there was also a decline in the third quarter.