Should J&J Spin Off Its Consumer Business?
Johnson & Johnson’s (NYSE:JNJ) consumer business has underperformed relative to its pharmaceutical and medical devices businesses of late. Not only has the division’s growth flattened out, but its margins are also meaningfully lower than the other two. Accordingly, some activist investors have been pushing J&J to spin off the business to unlock shareholder value. However, J&J would likely be well-served to wait before making such a move. J&J’s popular and trusted consumer brands such as Johnson’s Baby, Clean & Clear and Neutrogena have intangible value, which is reflected in its valuation but may not be realized in a spin-off. Further, there are some other key reasons that make us believe that J&J may not be ready for the spin off yet. We have created a dashboard using Trefis’ interactive technology that detail these reasons and show scenarios based on various value and driver assumptions. In addition, we have listed out these reasons below.
The Evidence Of Conglomerate Discount Is Not Clear
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Eliminating a “conglomerate discount” is often a key rationale for spinning off unrelated businesses. The idea is that if a conglomerate can be broken into independent focused business, it could fetch a higher valuation in the market. However, in J&J’s case, the evidence of a conglomerate discount is less clear. The chart above compares the P/E multiples of various, more focused pharma companies. We see that J&J (bar highlighted in light gray) is trading at a higher multiple (25.3) than many of them. For instance, Sanofi has a P/E multiple of 20.35, in comparison to Roche’s 22, Pfizer’s 22.4, and AstraZeneca at 25.5. Despite having three large varying businesses – pharmaceuticals, medical devices and consumer healthcare – J&J still appears to trade at a healthy valuation compared to many of its peers.
The additional concern is that J&J’s Consumer Healthcare Operating Profit Margin is around 15%, which is lower than the peer average of 20%. Therefore, there exists a risk that the stand-alone valuation could be suboptimal. Ideally, J&J would like to improve the division’s profitability meaningfully before spinning it off. You can see more about the margins, and the valuation impact of margin expansion, on our interactive dashboard.
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