Thursday January 26, 2012
by George Putnam, editor The Turnaround Letter
Founded in 1886 by three brothers to produce first aid kits, Johnson & Johnson (JNJ) has grown into one of the largest healthcare products companies in the world, with one of the strongest balance sheets in American industry.
So how can we feature this as a turnaround stock? Because the stock price has gone essentially nowhere for about ten years. The stock traded at 65 in 2002 and it trades around 65 today.
Back in 2002, investors were willing to pay more than 25 times the company's earnings, but they've gotten so inured to its consistently good results that they now value the stock at about 13 times earnings.
And so the only thing about J&J that needs to turn around is investor perceptions. And we think it will.
The company has a broadly diversified product link that seems largely immune to economic headwinds. It has leadership positions in a large number of its markets, with approximately 70% of revenues coming from products that are either #1 or #2 in global market share.
Its sales are geographically diversified as well, with more than half coming from outside the US. Moreover, the company is not too heavily dependent on any one product or market.
The balance sheet is rock solid. J&J is one of only four American companies able to maintain its AAA credit rating -- implying that it is more creditworthy than the US government.
While the healthcare sector seems to get more than its share of bad press, it is likely to remain a strong growth sector for the foreseeable future.
The aging of the population in the developed world and increased access to healthcare in less developed countries both bode well for J&J's products.
Even if you have to wait a while for Wall Street to warm up to the stock again, the generous 3.5% yield compensates you while you wait.
Moreover, the dividend is very likely to rise; the company has increased its dividend every year for 49 consecutive years.
Johnson & Johnson may not be a very typical 'turnaround' stock, but we think it will be a rewarding one.
Learn more about this financial newsletter at George Putnam's The Turnaround Letter.