While the markets are close to all-time highs, Johnson & Johnson (NYSE:JNJ) stock has been left out of the party. This year the return is a mere 2.43%.
But unfortunately, this weakness is nothing new. Note that for the past five years, JNJ stock has gained an average of 6.5%
What’s going on here? There are a variety of factors. First of all, the company has a diverse set of mature businesses, which tends to result in lower growth on the top line. Next, it does not help that it has gotten tougher to come up with new drugs.
Then there is the nagging issue of litigation. The most notable example of this is the situation with the opioid epidemic. Johnson and Johnson recently lost a case in the Oklahoma state courts for $572 million. Later this week, the company agreed to settle a $20.4 million lawsuit in Ohio.
So yes, all this sounds kind of bad, right? This is true. But I still think there are bullish factors with Johnson and Johnson stock. In fact, I think it’s a compelling value play that has the potential for providing much better returns in the years ahead.
So, let’s take a look:
Franchises and Stability
Johnson and Johnson has been around for over 130 years. This is certainly a testament to the company’s focus on creating long-term value and developing powerful franchises. Some of its iconic brands include Neutrogena, Aveeno, Tylenol, Motrin and Band-Aid. Keep in mind that 70% of sales come from products that have either number one or two global market positions.
The company also has a massive platform, which serves one billion patients each day. In other words, JNJ should withstand any kind of adverse economic situation.
According to the annual shareholder letter from CEO Alex Gorsky: “We remain focused on leveraging our broad-based capabilities to continue to drive the next generation of growth across our entire portfolio, both in markets where we have greater opportunity to compete, as well as in the markets where we lead, which include our 26 platforms that each delivered a billion dollars or more in sales last year.”
Financial Powerhouse
Other than Microsoft (NASDAQ:MSFT), Johnson and Johnson has a AAA credit rating. Then again, the company has a long history of success. For 57 consecutive years, JNJ has increased its dividend (the current yield is 3%).
But might the opioid exposure have a major adverse impact on the company’s financial strength? Well, not necessarily so. David Reischer, attorney and operator of LegalAdvice.com stated:
The fact that the judge found in favor of the state but only entered a $572 million judgment based on the legal theory of ‘public nuisance’ suggests that the judge was skeptical of the state’s legal theory and the extent of the company’s liability.
The ‘public nuisance’ theory is not a strong legal argument that would lend itself to creating massive liability for Johnson & Johnson. The judge clearly recognized that opioids drugs are not a defective product, which typically is a needed component in order to make a liability claim. It is very easy to see that the defendants can argue that liability should mostly fall on the prescribing doctors and patients who abuse the drug.
Growth Drivers for Johnson and Johnson
Johnson and Johnson is one of the world’s biggest spenders on innovation. Last year, the company shelled out $10.8 billion on research and development.
But of course, there has also been an aggressive mergers and acquisition strategy that has helped to bolster the platform. What’s more, there are the many partnerships. For example, JNJ has teamed up with Apple (NASDAQ:AAPL) to leverage mobile apps to help treat heart problems.
But perhaps the most important driver is the pharma segment (which comprises the majority of total revenues), which has many promising candidates. Within the next few years, the company is expected to file 15 new drug applications as well as 40 for existing drugs. For example, the drug Niraparib – which is in development with GlaxoSmithKline (NYSE:GSK) – is for prostate cancer. Note that it has already proven effective for ovarian cancer and has the potential for being a blockbuster.
As InvestorPlace.com’s James Brumley has noted, JNJ’s “drug development pipeline is stronger than the market’s giving it credit for.” And that’s very good news in the long run for JNJ stock.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.