Tuesday, April 19, 2011

Is J&J Turning a Corner?

Johnson & Johnson (JNJ) has certainly had a rough go of it with a string of product recalls. The latest quarterly results won't erase that but the results look like progress.

It's not news that Johnson & Johnson is and has been a cash machine throughout the financial crisis and recent extremely disappointing recall difficulties. The fact that revenue began rising again and earnings came in a bit stronger would seem to be.


From the earnings press release:

"Our pharmaceuticals business demonstrated strong growth this quarter led by the performance of recently launched products. We delivered solid earnings while making the investments necessary to advance the robust pipelines across our businesses," said William C. Weldon, Chairman and Chief Executive Officer.

"The innovations we are bringing to the market, the changes we are implementing in manufacturing and quality, and the dedication of the people of Johnson & Johnson, give us great confidence in the future growth prospects of our business," said Weldon.

Generally, if it's a good business with durable advantages my view is the noise of quarterly earnings makes little sense to expend much energy on. Yet, when a company has been struggling with quality and other issues, quarterly earnings becomes a way to get an indication of progress. 

Whether Johnson & Johnson has turned a corner is tough to know. I have no idea. As they work through their serious short-to-intermediate term operational problems, it's a business I continue to want to own even if the stock is likely to be unexciting for an extended period. Others may be interested in trying to time it/wait for some catalyst. That's understandable but carries its own risks. I happen to like the current price relative to current intrinsic value. More importantly, I like the current price relative to the prospects for the business to compound in value over 10 to 20 years.

"I can't recall ever once having seen the name of a market timer on Forbes' annual list of the richest people in the world." - Peter Lynch

Attempting to time it creates the risk of missing it. An error of omission. For some mediocre businesses that'd be okay. Not J&J. It's the kind of business I want to own for a long time once available at a fair price. For me that's around current prices.

If the investing horizon is long, buy when a good business has real but fixable problems that suppress valuations.

At least for me, judging whether price provides a margin of safety relative to estimated intrinsic value is easier than trying to time things correctly. I think getting the timing right is near impossible on a consistent basis. Paying the right price all risks considered is not. For J&J, would rather sit on dead money (or worse) for an extended period to eliminate that risk of missing it at a fair price.

As long as I'm correct in assessing the business's long-term prospects the dividend will, supported by significant free cash flow, offer some compensation for waiting.

Adam

Have established a long position in JNJ
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
 
Site Meter