JNJ’s Splenda Sale Shouldn’t Be A Concern For Investors

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Johnson & Johnson

Johnson & Johnson (NYSE:JNJ) has agreed to sell its iconic sweetener product SPLENDA to Heartland Food Products Group. [1] The terms of the deal have not been disclosed yet, but it is not hard to see why the company may no longer be interested in this business. First, Splenda sweetener is part of Johnson & Johnson’s consumer products segment which has operated on very low margins as compared to pharmaceuticals or medical devices businesses. Second, Splenda’s and other sucralose products’ prices are likely to suffer going forward due to weakness in carbonated drinks market globally. Thus, it makes little sense for the company to continue in this business, especially when there are bigger and more promising opportunities on the pharma side. For investors, this is not a move worth contemplating.

Our current price estimate for Johnson & Johnson stands at $107, which is at a premium of more than 10% to the market price. While the global markets have fluctuated recently, we believe that Johnson & Johnson’s longer term outlook doesn’t warrant material change as of now.

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See our complete analysis for Johnson & Johnson

We estimate that Johnson & Johnson’s consumer business constitutes merely 2% of the company’s stock. The EBITDA margins are much lower than those of the pharma and medical devices businesses, and the revenue contribution is much smaller. The global market growth is also low and J&J is facing increasing competition in this segment. The lack of significant growth opportunities makes J&J’s consumer business a secondary concern. On top of that, Splenda is a small portion of this segment. The move is part of the company’s strategy of streamlining the consumer business, which in our opinion, is the right thing to do. Last year, J&J sold its KY brand to Reckitt Benckiser (read Johnson & Johnson’s Sale Of K-Y Brand To Reckitt Benckiser Confirms Focus on Pharma).

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Notes:
  1. Johnson & Johnson Will Sell Splenda Sweetener to Heartland Food, Bloomberg, Aug 25 2015 []