J&J returning as a growth stock

Technology and health care analyst Steven Zicherman of Vancouver-based Odlum Brown reiterates his “buy” recommendation and 12-month target price of $117 for health-care giant Johnson & Johnson (JNJ—NYSE).

The company, which owns popular brands such as Tylenol and Band-Aid, has three main operating divisions: Medical Devices and Diagnostics, Pharmaceutical, and Consumer.

In making his “buy” recommendation, Mr. Zicherman highlights a number of factors. These include the broader health-care industry, the company itself, and the stock’s valuation.

The analyst notes that the overall industry is huge, generating about $8.4 trillion in revenue in 2012, or about 10 per cent of global gross domestic product. This is expected to grow three to five per cent a year over the next decade. He expects Johnson & Johnson–the most diversified company in the industry–to be a key beneficiary of this growth.

For one thing, he points out, “Many of the markets tend to have high barriers to entry and oligopolistic market characteristics”. Regulatory and government influences also make it hard for new competitors to challenge established players.

The analyst notes that although there are 3,500 pharmaceutical and biotech companies in the world, the 10 largest firms generate more than half of the industry’s total revenue. He believes that “this is unlikely to change anytime soon”.

As for the company itself, Mr. Zicherman reminds investors that Johnson & Johnson has been around since 1886, has increased its adjusted profit for 30 consecutive years, and hiked its dividend for 52 years in a row.

Johnson & Johnson is the dominant player in most areas and categories in which it operates. About 70 per cent of its sales come from products that are number one or two in their markets.

Mr. Zicherman notes that the stock has been out of favour in recent years, on a combination of external factors (the Great Recession) and company-specific issues (the expiration of patents, manufacturing/quality control issues, and hip-replacement recalls).

However, he believes these issues are largely behind it and that Johnson & Johnson “is at the relatively early stages of re-emerging as a growth story”.

The analyst also expects the stock to benefit as investors are drawn to its “low-risk profile, super-strong balance sheet, modest valuation, growing dividend, and lower-than-average stock price volatility”.

Although Mr. Zicherman says the stock is no longer cheap, he expresses confidence in Johnson & Johnson’s ability to continue to raise its EPS in the mid-single digits range, boost its dividend, and buy back shares.

Investor’s Digest of Canada, MPL Communications Inc.
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