Johnson & Johnson (NYSE:JNJ) will announce its earnings for Q1 2012 on April 17. Over the past few years, JNJ has not generated huge returns for its investors due to its subdued growth and constrained margins. It’s 1-year, 5-yera and 10-year gains on its stock price are all under 10%. And we don’t expect to see much change happening in this quarter as well. However, the long term prospects for the company are sound and with the much anticipated completion of Synthes acquisition by mid 2012, the outlook will improve.
An overhaul in the business model can also bring about substantial positive changes going forward. JNJ is one of the largest player in healthcare and operates through three different segments namely, consumer, pharmaceuticals, and diagnostics. It competes with Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Abbott Labs (NYSE:ABT).
We maintain a $72.45 price estimate for JNJ, which is nearly 10% above market price largely based on the its long term potential for value creation.
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DePuy Impacted by Hip Replacement Failure; Margins Under Pressure
During the quarter, JNJ decided to discontinue the production of ASR hip implants because of repeated concerns over product safety for patients by FDA and declining sales. DePuy Orthopedics and Spine contributes nearly 11% to the $72 Trefis price estimate for JNJ.
In an environment of slower growth amid EU pharma austerity, companies try to focus on margin improvement to create value for investors. Evidently, healthcare companies have aggressively put in efforts to cut costs to offset the impact of economic events, but J&J has not been very proactive in this area especially. This has directly impacted its margins.
Sources of Value
JNJ is one of the most diversified company in healthcare sector with worldwide operations. Its approach towards emerging markets has been subdued in the past and its presence in the consumer segment in emerging markets has been weaker relative to its peers. The company will look to capitalize these markets which can prove to be a major source of value for the company going ahead.
The Synthes acquisition announced in April 2011 will be completed during 2012 and should strengthen the already formidable diagnostics business of JNJ. It is expected to drive growth for JNJ in the coming years. There are some potentially big drugs lying in the JNJ pipeline like Xarelto, Simponi which can be huge success in future. However, the company should look for inorganic means to build onto its pipeline.