A Healthy Appreciation of Johnson & Johnson

 | Jul 16, 2013 | 3:35 PM EDT
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Yes, Johnson & Johnson (JNJ) has gone up too much. Yes, JNJ is now richly valued; a 29% gain with a 2.5 Price/Earnings/Growth rate is expensive. But if you sell it, the question is, will you be able to get back in?

Here are a couple of things that you need to think about when you consider JNJ's price.

First, this one had been totally undermanaged by former CEO William Weldon. Undermanaged is a euphemism for badly managed, because, under Weldon, everything that could go wrong seemed to go wrong. So, I would say the stock should never have been as low as it was when Alex Gorsky took it over a little more than a year ago.

It was hard to do worse than Weldon, particularly when it came to what seems like the endless recalls for their consumer products, like Tylenol. Now, though, that division is bouncing back. Best example: Extra Strength Tylenol's market share has doubled in the short time since it came back on the market.

Second, the pharmaceutical and medical device businesses are performing above levels this company saw under Weldon. I know it seems almost too good to be true to ascribe so much to Gorsky's leadership, but it's as if the whole company's energized by the guy, and the sales force just seems to be doing much better in very competitive product environments.

I know the oncology franchise is coming on strong, and the anti-psychotics business has been boosted by long-acting methods of delivery. Those were in the works before Gorsky came in. Still, when you go through the quarter, you can tell that this company has real revenue growth -- not just that kind of bottom-line nonsense that JNJ pulled out of a hat for years through buybacks or tax rates or anything that made it look like it was doing better.

I still favor breaking this company up. I still think there is a lot of hidden value. But Gorsky has already scaled back loser divisions and invested more in the winners.

In short, the guy is as good as Weldon was bad. So you can ring the register. Can't blame anyone. But I can't wait for my charitable trust to get back in JNJ if the price comes down. It's the class of the field with fabulous growth and, best of all, no more recalls.



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