Slow and Steady Pays Off

 | Jul 09, 2013 | 4:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

jnj

Many defensive, consumer-staple names have run way up over the last 18 months. Even with the pullback on higher rates, many now come with price-to-earnings ratios around 20. There has been one laggard, however, that is still trading well below its historical multiple: Johnson & Johnson (JNJ).

The diversified healthcare player straddles the medical and consumer staple categories. This could explain why shares trade at a discount, because analysts can't figure out which one it belongs to. But here's the catch: JNJ is not only trading at a discount to its peers but also to its historical valuation. Look at some comparables in both sectors.

Johnson and Johnson trades at a P/E of 16.6x but has averaged 19.9x over the past 15 years. That's a 16% discount. Merck (MRK) trades at 15.7x, which seems lower, but trades at an historic multiple of 17.5x, a discount of only 10.3%. Bristol-Myers (BMY) trades at 20.6x times with a historic multiple of 22.1x.

J&J's consumer-staple peers are even costlier. Procter & Gamble (PG) trades at 19.4x and an historical 19.5x. Colgate-Palmolive (CL) trades at 20.8x and 22.8x historically. Clorox (CLX) trades at 19.5x and 19.6x, historically. It's very difficult to find discounts within the consumer-staples space.

Companies trading at a discount often do so for a reason. But other than the "conglomerate discount," nothing else is holding J&J back. The business is humming along just as well as any of the above companies.

The first quarter was great. The pharma division led the way, growing sales by 10.4% year-on-year and winning FDA approval of its type 2 diabetes drug. Devices completed its acquisition of Synthes and grew revenue 10.2%. Consumer has finally reversed its concerning decline, now growing revenue by a healthy 2.2%. Overall revenue growth was 8.5%, and 2.8% without the Synthes acquisition.

This year, revenue is expected to grow between 4.5% and 6.7% with operating earnings at about the same pace. We should then expect JNJ to continue its 50-plus year streak and increase the dividend. Next year, it should increase by between 6% and 7%.

We also have the possibility of a breakup further down the road. A spinoff of the pharma division would be most likely. When asked by analysts last quarter, CEO Alex Gorsky said they were still looking into it. Personally, I question how gainful a breakup would be. JNJ has been a conglomerate for a long time, and its P/E ratio has averaged about 20 for the last 15 years. Could a breakup send prices above that ratio? I'm skeptical. A breakup certainly worked for Abbott Labs (ABT), though.

In the meantime, JNJ offers steady growth in both earnings and dividend income, not to mention a 3.1% yield. The stock could go up 15% before reaching its historical valuation. Slow and steady can really pay off. For the long-term investor who doesn't want to take on much risk, JNJ sticks out like a healthy thumb.

Columnist Conversations

Volume in the SPY today was nearly double its 50 day average of volume. (The graph at the bottom of the chart ...
Is this the biotech revolution or the biotech bust? View Small Cap Biotechs Like Never Before: Transparency is...
Market got beat like a rented mule today as equities posted their second worst day of the year. Geopolitical ...
down 302 now, at 16577 the dow 30 is unchanged for 2014. roll the media hype!

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.