Johnson & Johnson (JNJ) could present a discounted buying opportunity amid its precipitous fall that began on Friday.
Shares are still being pushed downward Monday morning after posting a record one-day loss, in dollar terms, on Friday following the release of a Reuters report lambasting the company's handling of asbestos tainted talc.
Yet, analysts view the talc driven tumble as overblown and many are advising buying on weakness for the attractively priced stock.
"We think shares oversold today and would be buyers on weakness," Leerink Partners analyst Danielle Antalffy advised. "We think JNJ's business fundamentals will manage through this negative press -- particularly given that talc products make up less than 1% of total sales -- and, more importantly, that nothing has changed in JNJ's legal risk related to talc."
Old News
Antalffy explained that the company has long-standing litigation issues that have been covered in the press prior to the Reuters story, including the over $4 billion decision against the company in July.
"Witness the incredible slaughter of Johnson & Johnson by a Reuters piece that literally had no new revelations," Jim Cramer said about the reaction to the stock in his opening column Monday morning. "I have been through the article on a point by point basis measuring what had been out versus what we sellers thought was new."
Cramer explained that he could not find anything revelatory in the report.
Johnson & Johnson said as much in a response to Reuters on Friday, accusing the report of peddling incomplete information.
"J&J attorneys provided Reuters with hundreds of documents and directly responded to dozens of questions in order to correct misinformation and falsehoods," the company said. "Notwithstanding this, Reuters repeatedly refused to meet with our representatives to review the facts and refused to incorporate much of the material we provided them."
The material included strong cooperation with regulators, according to the company.
"The article ignores that J&J has cooperated fully and openly with the U.S. FDA and other global regulators, providing them with all the information they requested over decades," the statement reads. "We have also made our cosmetic talc mines and processed talc available to regulators for testing."
The decades of testing, regulation, and litigation suggest that much of the risk outlined in the Reuters report is already priced in.
Litigation Mitigation
In terms of the litigation, the company has shown itself to be a skillful litigator in recent years, putting it in a strong position to play down the legal impact of the Reuters report and ballooning number of asbestos-related cases against it.
Morgan Stanley analyst David Lewis highlighted the company's highest profile case in recent memory, the over $4 billion decision against the company for its connection to talc-related ovarian cancer.
"J&J's response indicated the company intended to pursue all available appellate remedies," he noted. "J&J indicated that prior verdicts in this court that have been appealed have been reversed. Since the July $4.7 billion verdict, there have been 5 additional cases that have gone to trial, 3 of which resulted in mistrials as juries could not agree on a verdict and 2 of which had juries that ruled in favor of J&J."
As such, a reaction that has wiped off more than 10 times the value of that decision does not account for any remedial action available form J&J.
"The company is well equipped to handle such legal charges thanks to its clean balance sheet and cash war chest," Jim Cramer's Action Alerts Plus team added in an update on Friday. "To that point, Johnson & Johnson ended the third quarter of 2018 with $19.36 billion in cash and short-term investments."
Such a war chest should equip the company to help temper the impact of the litigative risk and battle against plaintiffs without undue impact to the core company.
Even assuming that the company sees increased litigation against it amid the report, a highly probable outcome, the usual verdicts of these cancer claims suggests a far lower impact than the hit the stock has taken.
Wells Fargo analyst Larry Biegelsen pointed out that even if litigation against the company doubled, the $280,000 settlement that payouts average would only translate to a $6.5 billion liability. Such a liability would be very manageable within the context of the company's aforementioned war chest.
He added that once insurers are brought into the picture, the liability could be even lower.
Reputation Recovery
Also adding to analyst confidence in a comeback is the company's ability to regain its reputation amid troubling headlines.
"From a brand damage perspective, JNJ has suffered negative press in the past, including with a 2011 consent decree on its OTC business that resulted in pulling Tylenol and even children's Tylenol from store shelves," Leerink's Antalffy explained. "Despite this, JNJ claims to have largely regained all share in the few years since re-launching."
Such bounce-back ability should mitigate the worry over continued brand damage as well, especially as the company mounts an offensive on defending the safety of its products.
Risk Overreaction
All in all, the slide that has cost the company tens of billions in market cap is overdone in the view of many followers of the stock.
"As we think about the risk to JNJ here, on one hand, we believe it is highly unlikely the company's exposure to this talc issue will even come close to the ~$40bn in lost market cap today," J.P. Morgan analyst Chris Schott said. "Along those lines, we see [the recent stock] move as an over-reaction, especially from a longer-term perspective."
The consensus on the Street remains a "Buy" with a price target of $147.33 per share, well above Monday morning's price range.
(Johnson & Johnson is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells JNJ? Learn more now.)
