FMCG company Johnson & Johnson (JNJ: NYSE) drew the market’s attention yesterday after Citi analyst Joanne Wuensch began covering the stock with a ‘Buy’ rating. The rating may come as a surprise to some investors as the company’s key drugs did not perform well last year, as detailed below.
Still, the analyst has justified his rating based on product pipeline and fundamentals. Following the coverage by Citi, the stock closed at $142.01, down $1.47 or 1.02% from earlier close.
While issuing the rating, the analyst pointed out that the $82 billion revenue-generating company has gradually rebuilt itself via mergers & acquisitions, divestments, in-house R&D, and collaborations. JnJ, which operates under three business segments, namely consumer, pharmaceutical, and medical devices, generates much of its revenue from drugs such as Remicade, Invokana, Zytiga, Tremfya, Erleada, and Darzalex.
The company also leads in surgical and orthopedic robotics, in addition to electrophysiology. Wuensch does acknowledge that “the elephant in the room is litigation,” with lawsuits related to talc baby powder, opioids, and Risperdal products. However, she believes that the company’s fundamentals and product portfolio is strong, underscoring “ultimately, the amount that the company pays is very different than what is reported in the headlines.”
In 2019, shares of the company appreciated by 13% but still trailed the 24.7% rally recorded (based on the SPDR S&P Pharmaceuticals Index) by the pharmaceutical industry. For multiple reasons, the shares of JnJ did not perform well. This includes the poor performance of some of its flagship products, including rheumatoid arthritis drug Remicade, which generated sales of $4.40 billion for the fiscal year 2019, a decrease of 17.8% on a y-o-y basis.
The company was slapped with a fine of $344 million by a California court for delusive marketing of its pelvic mesh goods (surgical implants intended to treat pelvic organ prolapse). JnJ intends to appeal against the judgment, but there are several more lawsuits to be concerned about.
Even though some of JnJ’s pharmaceutical products are not performing well, drugs such as Stelara – used for the treatment of psoriasis and psoriatic arthritis – posted $6.40 billion in sales during fiscal 2019, representing a 23.4% y-o-y increase.
Similarly, Tremfya, a drug intended to treat severe plaque psoriasis, posted $1 billion in sales, an increase of 85.9% from the earlier fiscal year. Additionally, JnJs cancer drug Imbruvica posted $3.40 billion in sales, an increase of 30.4% y-o-y. Also, Darzalex, a drug prescribed for treatment of multiple myeloma, posted roughly $3 billion in sales, up 48% from fiscal 2018.
Notably, Imbruvica is also undergoing phase 3 testing for the treatment of mantle cell lymphoma, while Tremfya is in phase 3 trial for the treatment of pediatric psoriasis.
Recently, JnJ has submitted a supplemental Biologics License Application to the US Food and Drug Administration for Darzalex to be used for the treatment of multiple refractory myelomas.
The company boasts an attractive dividend history, with 50 years of successive dividend increases.
Regarding dividend declaration, CFO Joseph Wolk stated: As investors in Johnson & Johnson know, delivering a competitive and increasing dividend is a capital allocation priority for us. In 2019, we returned almost $10 billion to investors, which is approximately 50% of our free cash flow, increasing the quarterly dividend by 5.6%.
The current dividend yield of the company is 2.56%, while its payout ratio is 66.6. Wolk’s statement clearly indicates that investors can anticipate a further increase in the company’s dividend payout before next year.
Based on the reasons mentioned above, the analyst has given a target price of $163 for the New Brunswick, New Jersey-based company.
Citi’s ‘buy’ rating is expected to keep the stock bullish in the short term.
Technically, the stock has bounced off the support at 132.50. The money flow index is also having a reading above 50. Therefore, we are anticipating the stock to undergo a bullish reversal in the days ahead.
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