In a marketwhere a lot of investors are looking for safety, Johnson & Johnson (NYSE:JNJ) has been on a lot of financial advisers' lists as a 'safety stock'; high quality, large cap, with a low valuation and a yield that beats the 2% you can get on treasury bonds.
MoneyWeek, for instance, has an interesting article which shows how the current valuation levels for J&J have usually been the bottom for the shares - leading to potentially good gains for shareholders over the next few years. [1]
The business is well diversified. Though it's called 'big pharma', in fact only 40% of the operating profits come from pharmaceuticals, with slightly more from 'MD&D' (Medical Devices and Diagnostics), and the balance from consumer businesses [2] . The company has a highly diverse list of products. It also has very strong market positions; for instance it's the leader in major market such as coronary stents, blood screening and typing, oral rinses, and disposable contact lenses. It claims that it is either market leader or number 2 in nearly three-quarters of its markets, which qualifies it as a Buffett-style 'large moat' company. In consumer businesses, its brands include Band-Aid, Tylenol, Listerine, Sudafed, and Benadryl - a roll call of excellent brands.
It's also geographically diverse - in 2009, 50% of the business came from the US, with 16% in Asia-Pacific and Africa, and 26% in Western Europe.
What's not to like? Well, it seems that currently the company has a number of issues.
One is a major problem at one of its manufacturing plants. Fort Washington, which manufactures products for the consumer division, has had production shut down and will be renovated following concerns from the FDA. The problems are multiple - contaminated products, unclean plant, and inadequate quality control [3] . This probably won't have a massive impact on earnings - it affects at most 10% of the product base, and will probably be at most 1% dilutive, according to analysts at Wells Fargo [4] .
However, the problems at J&J have allowed generic OTC competitors to take a much higher share of the retail market - and may lead to a loss of reputation for J&J's brands, which could take a long while to recover from.
There are also, of course, issues with patent expirations and…
