• A number of its major drugs are facing difficulty as competition is kicking in both nationally and internationally.
• Pricing pressure resulting from both the administration and competition and a strengthening dollar could hurt the financials.
• History indicates that there might be a reduction in the $4.69 punitive and compensatory damages charged against Johnson.
• Dividend safety looks strong as indicated by FCFE and FCFF coverage ratios.
• The stock looks overvalued, but it is a hold given the firm’s substantial market position.

Investment Thesis

Competition in Johnson’s (JNJ) Remicade, Procrit, Velcade, Tracleer, andZytiga could significantly hurt Johnson. Johnson derived approximately $11.5 billion from these drugs in its latest fiscal year. Pricing pressure is heating up while the anticipated gains in the U.S. could adversely impact Johnson’s results. Earlier in December NYTimes reported that JNJ lost its motion to reverse a jury verdict that awarded $4.69 billion to women who blamed their ovarian cancer on asbestos in the company’s baby powder and other talc products. Factoring all the headwinds, Johnson provided conservative revenue guidance of 0%-1% for the coming year, and since Johnson likes to post surprises, I am guessing it has downplayed its guidance. But factoring the potential for market share loss, pricing pressure, a strengthening dollar, and litigation issues, Johnson does look overvalued. However, the firm has a substantial moat in the market, as a result, holding seems more logical.

Source: 10-K

READ FULL ARTICLE HERE