It was only a week ago that I wrote about Micrus Endovascular (Nasdaq: MEND) as a hot med-tech stock that investors should take a look at and consider for a growth-oriented portfolio. Well, I hope they looked quickly, because Johnson & Johnson (NYSE: JNJ) announced this morning that it was acquiring Micrus for $23.40/share in cash.
That is a total deal value of $480 million, but a rather small premium of only about 5%. The stock has had a strong run since mid-May, though, and some of the move from $16-and-change could have been a product of rumors and whispers about a deal. Given the relatively recent deal between Covidien (NYSE: COV) and ev3 (Nasdaq: EVVV), it seems even more probable that people were connecting the dots and assuming that MEND would get a bid.
Although I am a JNJ shareholder, I have ripped the company plenty of times for its M&A strategy -- the company often pays too much and gets too little.
I really actually do like this deal, though. First, JNJ is by no means overpaying. JNJ is paying about 4.2 times trailing sales for Endus, and that is a good price. Growing small-cap med-tech companies often normally trade at 4 or 5 times trailing sales, and buyout premiums usually push that to a 6-8x range.
Second, Micrus has good technology on the market that integrates nicely with Johnson & Johnson's existing neurovascular intervention business. Not only have Micrus's products shown strong clinical results, they have actually sold well in the market and become something of a threat to rivals like Boston Scientific (NYSE: BSX). In my analysis, then, the combination of MEND's high-quality embolization coils and JNJ's existing business is a strong one.
I have to say, though, that I wonder if these deal actually goes through at this price. There are several other companies that could make a lot of hay from the Micrus assets, and the deal price is not so high that these other companies could not come in with a sweeter offer. If you are a Micrus shareholder, that is something to look forward to; if you are a JNJ shareholder, it is something to dread.
Who else could get involved? How about Medtronic (NYSE: MDT), Cook, or Bard (NYSE: BCR)? Certainly BSX could be interested as well, but I doubt that they have the balance sheet liquidity to do the deal, and I really doubt that Micrus shareholders would be thrilled about getting BSX shares instead of JNJ cash.
At the bottom line, I had modeled that MEND was worth about $25 a share. Given that MEND's management was willing to take less than that, I wonder where my model might have been a bit too optimistic. In any case, that spread between my fair value and the deal price is what a former boss of mine would describe as "close enough for jazz", so I am not going to worry about it too much. Moreover, I have also felt that JNJ needed to get more aggressive in finding new growth opportunities, so this is a deal and a price than I can live with pretty happily.
I would still recommend investors buy shares of JNJ. I also wonder if MEND shares are not worth a shot as an arbitrage play - so long as you can get the shares at a price that will still leave you with a profit after commissions, it might be worth the gamble to see if another bidder appears.
Disclosure - I own shares of JNJ.
Showing posts with label JNJ. Show all posts
Showing posts with label JNJ. Show all posts
Monday, July 12, 2010
Thursday, July 8, 2010
Johnson & Johnson - What The Hell Are You Doing?
I feel the need to invoke Vince Lombardi when I think about Johnson & Johnson these days - that is, "what the hell is going on out there?!?!"
JNJ, a company known for it's time-tested and valuable brands, has announced what is, by my count, the eighth in a recent stream of recalls for popular over-the-counter drugs like Tylenol and Benadryl. Some of the recalls have been tied to unpleasant smells in the product, others to small metal bits, and others tied to product being stored on pallets that had nasty chemicals on them.
Not surprisingly, these recalls are affecting sales as at least some consumers are deciding to stay well clear of any OTC product with "Johnson & Johnson" prominent on the label. Although the print media seems to be taking on a certain amount of breathlessness in talking about the "tens of millions of dollars in sales" that the company is losing, a little perspective is in order.
The consumer business does not "drive the bus" at J&J from a revenue standpoint (it contributed $3.8B of $15.6 billion in the last quarter), and it contributes even less as a percentage of total operating income. So, losing "tens of millions" due to these US recalls is not even 1% of the company's quarterly total.
Nevertheless, the Consumer division a reliable generator of cash flow and it is a cornerstone of the company's brand value. Unlike the company's drug business, generic competition isn't so much of a threat and the R&D burdens are quite a bit lower. In other words, it is a fantastic business ... so long as you don't screw it up.
What is odd about this series of recalls to me is that ... well, it has been a series of recalls. Any one big screw-up is somewhat understandable - a machine breaks, throws shrapnel into the product, and a production batch has to be recalled. Fine, that happens.But a series of mistakes like these have to make you wonder if shortcuts are being taken and if the company has pushed "efficiency" too far.
Here's an odd thing - the recalls seem to be stemming from different facilities. That means one of two things. Either the company is hitting an improbable string of bad luck and a number of things are just happening to go wrong at the same time, or perhaps there is a systemic quality control problem. Clearly that would be a serious issue for the company, and one that the FDA would be sure to investigate extensively.
Maybe there is a third option as well - in response to the first recall (or two ... or three), it would not surprise me if JNJ HQ sent out memos to all plants instructing the managers to triple-check *everything* that was going on. As anybody who has worked in a manufacturing facility or even just a large organization can attest, if you go looking for problems, you will find some.
Predictably, analysts and other commentators are lining up to call for the CEO's head, but I think that's silly. If Weldon needs to be fired, it is because of how the pharmaceuticals business has stagnated, how Abbott stole the march on drug-coated stents, and how the company has made a series of iffy (if not stupid) acquisitions in the device business. It is not as though Weldon has been ordering people to ship bad product or is personally contaminating them. For him to resign (or get fired) over this strikes me as Japan-style apology-quitting and I think that's a waste of talent.
Of course, if more information comes out that he signed off on irresponsible shortcuts in quality control to save money, he should go. Likewise, if Weldon isn't made to pay a price in terms of his bonus I'm going to be very annoyed as a shareholder. But to fire a CEO when the company is in the middle of a crisis makes about as much sense as firing a general when you're still in the middle of the battle. All it does is sow more chaos into a chaotic situation.
In any case, I will say this - Weldon needs to get his butt in a make-up chair and shoot a mea culpa ad to go up in prime-time on all channels. JNJ needs to be front-and-center saying, in effect, "we know you have trusted us for many years, and we have badly abused that trust with these mistakes. We are taking steps to fix it now, and we will do anything we can to see that it doesn't happen again".
What's an investor to do?
Oddly enough, the market hasn't reacted all that badly to this string of recalls. Maybe that's due to the oil spill or the economy or some other distraction. I mean, normally I think the idea of eight recalls of well-known brands that are in every supermarket and pharmacy, made by a universally-recognized company, would be a prominent news story. Then again, maybe it's also because nobody has been hurt - a recall due to smelly pills may not meet the current bloodthirsty standard for news.
As I said, the whole Consumer business is only a modest contributor to operating income, so even a nasty sales drop for products like Tylenol isn't going to really hurt earning much at all (if at all). Moreover, since it doesn't seem that anybody has been hurt by the products, the lawsuit risk would appear to be controllable as well.
I've owned JNJ for a while now because, faults aside, it is still a high-quality name operating in three very attractive businesses. Moreover, it produces solid cash flow, invests large sums into R&D, pays a decent dividend, and is certainly not overvalued. Companies of lower quality than JNJ have survived even bigger foul-ups, so I see no reason to alter my fundamental thesis or models on this one. I own JNJ and would still recommend others buy it.
Disclosure - I own shares of JNJ
JNJ, a company known for it's time-tested and valuable brands, has announced what is, by my count, the eighth in a recent stream of recalls for popular over-the-counter drugs like Tylenol and Benadryl. Some of the recalls have been tied to unpleasant smells in the product, others to small metal bits, and others tied to product being stored on pallets that had nasty chemicals on them.
Not surprisingly, these recalls are affecting sales as at least some consumers are deciding to stay well clear of any OTC product with "Johnson & Johnson" prominent on the label. Although the print media seems to be taking on a certain amount of breathlessness in talking about the "tens of millions of dollars in sales" that the company is losing, a little perspective is in order.
The consumer business does not "drive the bus" at J&J from a revenue standpoint (it contributed $3.8B of $15.6 billion in the last quarter), and it contributes even less as a percentage of total operating income. So, losing "tens of millions" due to these US recalls is not even 1% of the company's quarterly total.
Nevertheless, the Consumer division a reliable generator of cash flow and it is a cornerstone of the company's brand value. Unlike the company's drug business, generic competition isn't so much of a threat and the R&D burdens are quite a bit lower. In other words, it is a fantastic business ... so long as you don't screw it up.
What is odd about this series of recalls to me is that ... well, it has been a series of recalls. Any one big screw-up is somewhat understandable - a machine breaks, throws shrapnel into the product, and a production batch has to be recalled. Fine, that happens.But a series of mistakes like these have to make you wonder if shortcuts are being taken and if the company has pushed "efficiency" too far.
Here's an odd thing - the recalls seem to be stemming from different facilities. That means one of two things. Either the company is hitting an improbable string of bad luck and a number of things are just happening to go wrong at the same time, or perhaps there is a systemic quality control problem. Clearly that would be a serious issue for the company, and one that the FDA would be sure to investigate extensively.
Maybe there is a third option as well - in response to the first recall (or two ... or three), it would not surprise me if JNJ HQ sent out memos to all plants instructing the managers to triple-check *everything* that was going on. As anybody who has worked in a manufacturing facility or even just a large organization can attest, if you go looking for problems, you will find some.
Predictably, analysts and other commentators are lining up to call for the CEO's head, but I think that's silly. If Weldon needs to be fired, it is because of how the pharmaceuticals business has stagnated, how Abbott stole the march on drug-coated stents, and how the company has made a series of iffy (if not stupid) acquisitions in the device business. It is not as though Weldon has been ordering people to ship bad product or is personally contaminating them. For him to resign (or get fired) over this strikes me as Japan-style apology-quitting and I think that's a waste of talent.
Of course, if more information comes out that he signed off on irresponsible shortcuts in quality control to save money, he should go. Likewise, if Weldon isn't made to pay a price in terms of his bonus I'm going to be very annoyed as a shareholder. But to fire a CEO when the company is in the middle of a crisis makes about as much sense as firing a general when you're still in the middle of the battle. All it does is sow more chaos into a chaotic situation.
In any case, I will say this - Weldon needs to get his butt in a make-up chair and shoot a mea culpa ad to go up in prime-time on all channels. JNJ needs to be front-and-center saying, in effect, "we know you have trusted us for many years, and we have badly abused that trust with these mistakes. We are taking steps to fix it now, and we will do anything we can to see that it doesn't happen again".
What's an investor to do?
Oddly enough, the market hasn't reacted all that badly to this string of recalls. Maybe that's due to the oil spill or the economy or some other distraction. I mean, normally I think the idea of eight recalls of well-known brands that are in every supermarket and pharmacy, made by a universally-recognized company, would be a prominent news story. Then again, maybe it's also because nobody has been hurt - a recall due to smelly pills may not meet the current bloodthirsty standard for news.
As I said, the whole Consumer business is only a modest contributor to operating income, so even a nasty sales drop for products like Tylenol isn't going to really hurt earning much at all (if at all). Moreover, since it doesn't seem that anybody has been hurt by the products, the lawsuit risk would appear to be controllable as well.
I've owned JNJ for a while now because, faults aside, it is still a high-quality name operating in three very attractive businesses. Moreover, it produces solid cash flow, invests large sums into R&D, pays a decent dividend, and is certainly not overvalued. Companies of lower quality than JNJ have survived even bigger foul-ups, so I see no reason to alter my fundamental thesis or models on this one. I own JNJ and would still recommend others buy it.
Disclosure - I own shares of JNJ
Friday, May 21, 2010
Great Dividend Payers In Medical Technology
This was posted late today on Investopedia.
I would clearly have included Johnson & Johnson (JNJ) in the list, if not for the fact that Investopedia does not allow writers to even mention stocks they own. I do own shares of JNJ.
Here is the article:
There are a lot of solid reasons for investors to include medical technology stocks in their portfolios. The healthcare sector has grown faster than the economy and seems poised to continue to do so, and the more established names in this field routinely post excellent returns on capital. Better still, medical technology is generally spared the feast-famine cycle of patent expirations that bedevil the pharmaceutical sector.
Now we can add another reason to like medical device stocks - dividends. As many investors already know, the stocks of companies that pay dividends tend to outperform those that do not. When you combine the advantages of dividend-paying stocks with the advantages of medical technology stocks, you have a powerful mix.
For the full article, please continue on to:
http://stocks.investopedia.com/stock-analysis/2010/Great-Dividend-Payers-In-Medical-Technology-ABT-BAX-MDT-BDX-BSX0521.aspx
I would clearly have included Johnson & Johnson (JNJ) in the list, if not for the fact that Investopedia does not allow writers to even mention stocks they own. I do own shares of JNJ.
Here is the article:
There are a lot of solid reasons for investors to include medical technology stocks in their portfolios. The healthcare sector has grown faster than the economy and seems poised to continue to do so, and the more established names in this field routinely post excellent returns on capital. Better still, medical technology is generally spared the feast-famine cycle of patent expirations that bedevil the pharmaceutical sector.
Now we can add another reason to like medical device stocks - dividends. As many investors already know, the stocks of companies that pay dividends tend to outperform those that do not. When you combine the advantages of dividend-paying stocks with the advantages of medical technology stocks, you have a powerful mix.
For the full article, please continue on to:
http://stocks.investopedia.com/stock-analysis/2010/Great-Dividend-Payers-In-Medical-Technology-ABT-BAX-MDT-BDX-BSX0521.aspx
Monday, December 1, 2008
Memo to JNJ -- WTF?
I've been a Johnson & Johnson shareholder for some time ... but more and more I'm wondering why.
Today JNJ announced that it's paying a little more than $1B for Mentor -- a company known mostly for breast implants and wrinkle treatments. This follows other phenomenally successful JNJ buys like Conor in recent years (tongue firmly in cheek for those who don't know my sarcasm).
Now, is there real growth potential in the aesthetic and reconstructive segments of health care? Sure. Elective cosmetic procedures are going to slow to a trickle during this recession, but I don't care so much about that ... they'll be back eventually and whether that's 2010, 2011, or 2012 isn't all that important to me. What's more, JNJ does have some exposure to that market already and could (arguably) use more products to leverage it existing salesforce there.
But more and more I wonder if JNJ management really has a plan and, if so, whether that plan is worth hanging around for as a shareholder. I'm not universally opposed to growth-by-acquistion in the med-tech space, and companies like Medtronic have shown that it can be a successful strategy. But I am opposed to serial acquirers who add little to the businesses they buy.
There's plenty of interesting cardiology, neurology, and radiology technologies out there, to say nothing of life sciences and diagnostics. These are technologies that serve real diseases, have solid reimbursement, and can be cornerstone growth platforms for a health care company. Instead, JNJ goes the way of fake ta-ta's.
I hope I'm wrong about this and it turns out that JNJ isn't overpaying for a non-strategic asset, but I'm increasingly feeling that it may be time to sell my JNJ shares and move on to the next big idea.
Today JNJ announced that it's paying a little more than $1B for Mentor -- a company known mostly for breast implants and wrinkle treatments. This follows other phenomenally successful JNJ buys like Conor in recent years (tongue firmly in cheek for those who don't know my sarcasm).
Now, is there real growth potential in the aesthetic and reconstructive segments of health care? Sure. Elective cosmetic procedures are going to slow to a trickle during this recession, but I don't care so much about that ... they'll be back eventually and whether that's 2010, 2011, or 2012 isn't all that important to me. What's more, JNJ does have some exposure to that market already and could (arguably) use more products to leverage it existing salesforce there.
But more and more I wonder if JNJ management really has a plan and, if so, whether that plan is worth hanging around for as a shareholder. I'm not universally opposed to growth-by-acquistion in the med-tech space, and companies like Medtronic have shown that it can be a successful strategy. But I am opposed to serial acquirers who add little to the businesses they buy.
There's plenty of interesting cardiology, neurology, and radiology technologies out there, to say nothing of life sciences and diagnostics. These are technologies that serve real diseases, have solid reimbursement, and can be cornerstone growth platforms for a health care company. Instead, JNJ goes the way of fake ta-ta's.
I hope I'm wrong about this and it turns out that JNJ isn't overpaying for a non-strategic asset, but I'm increasingly feeling that it may be time to sell my JNJ shares and move on to the next big idea.
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