Maybe The End Of The Line With JNJ

This earnings report may be the straw that breaks the camel's back between me and Johnson & Johnson (NYSE: JNJ). It has been a while since JNJ has really impressed me, and I find that I often end up telling myself "don't worry, it'll get better ... after all, it's JNJ". Well, sometimes once-great companies don't rebound and just continue to fade.

A Quick Run Through The Numbers
JNJ reported that revenue fell more than 5% this quarter, missing the average estimate and actually coming in below the lowest published estimate. Consumer was the worst performer of all, as sales fell 15%. Within that, woundcare was down 16% and OTC was absolutely crushed (sales down almost 31%) by the never-ending series of recalls. Pharmaceutical sales were down almost 5% and there were almost no signs of life in the segment, with only Prezista showing any meaningful growth.

Devices were ironically the best story this quarter, as sales rose 0.2%. Cordis (drug-coated stents) was weak yet again though, and sales fell 10%. Orthopedic sales (DePuy) were also down (2%), and so was diabetes (down 2%). Ethicon was up 4% and diagnostics grew 7%.

Oddly enough, gross margins were stable this quarter and that's pretty good considering that the company should have seen operational de-leveraging. Moreover, operating margin actually expanded by 1.5%, but almost half of that was from lower R&D spending. I do NOT like to see health care companies cutting their R&D budgets, but even moreso when their current revenue trajectory and near-term pipeline are uninspiring.  At the bottom line, earnings were down 12%

This And That
It annoys me that JNJ does not provide a cash flow statement with its earnings. If other equally large and diverse conglomerates can do so, what is their excuse? I frankly find it dismissive and disrespectful to investors, but I don't expect that they will change. Nevertheless, it means I cannot immediately re-run a DCF analysis on JNJ shares, but I cannot imagine it will be better than my last run-through.

I also take issue with the company's strategy. JNJ overpaid for Crucell; vaccines can be a great business, but Crucell is not going to help the company much in the short-term. And if JNJ did make a bid for Smith & Nephew (NYSE: SNN), it's just another sign (to me, at least)  that JNJ cannot compete on the basis of its own internal R&D efforts. What next, a bidding war for Beckman Coulter (NYSE: BEC)? And then there's the whole mess in Consumer ... though I believe management has actually started handling that better and that's on the way to resolution.

The Bottom Line
On the basis of my last valuation run, JNJ shares are worth about $71.50 - about 15% higher than where the stock will open today. If JNJ were executing well and giving my confidence in management's abilities and direction, I wouldn't mind that relatively low appreciation potential.

But JNJ is *NOT* executing well, and I cannot see any immediately obvious reasons to think that will change anytime soon. Consequently, I think I will be selling these shares. I'd frankly rather pay up for Abbott (NYSE: ABT) or Becton Dickinson (NYSE: BDX) than own JNJ, and if I was going to own a troubled health care company that needed some TLC, why not own Roche (Nasdaq: RHHBY) instead? Obviously, I'm annoyed as I write this, so I need to let the emotion fade a bit and then decide how to proceed. At this point, though, I'm thinking it's time to move on from JNJ.

At this point, I would probably SELL (though not short) JNJ shares.

Disclosure: I own shares of JNJ

Johnson & Johnson and Boston Scientific - Could They? Should They?

I'm sure I'm not the only person thinking about whether or not Johnson & Johnson (NYSE: JNJ) and Boston Scientific (NYSE: BSX) might end up together. I think this subject was raised recently by a long-term correspondent of mine and it's been rattling around in my brain since.

JNJ has definitely been busy of late - acquiring Micrus and publicly entering into a mating dance with vaccine biotech Crucell (Nasdaq: CRXL). Likewise, BSX has been active as well - buying Asthmatx and reportedly talking about selling its neurostim and neurovascular businesses.

So maybe it's time for these two long-time rivals to get together. It would probably cost less than $12B for JNJ ... certainly not an impossible deal to contemplate. 

Why would JNJ do this? Well, it is pretty clear from the stagnant growth at JNJ that management needs to figure out some additional ways to grow and growth-through-acquisition is a tried-and-true (if qualitatively poor) way of growing. For BSX, it would be tantamount to a mercy killing for this long-underperforming company.

Beyond that, though, JNJ did once want to get into the CRM business (by buying Guidant) until BSX pushed the bidding up to a ridiculous level - a decision that has effectively crushed BSX ever since. Beyond that beyond, there are some other compelling reasons BSX could appeal to JNJ. It would potentially reinvigorate JNJ's drug-eluting stent business, even though both JNJ and BSX are losing the race against Abbott Labs (NYSE: ABT). I hope I don't sound too cynical, though, when I suggest that combining two has-beens seldom leads to a new leader...

Stents aside, BSX does have some solid business units that would not only round out JNJ's offerings, but could represent fix-er-up turnaround opportunities (the BSX IVUS business, which has been all but ceded to Volcano (Nasdaq: VOLC) comes to mind).

I don't believe that JNJ would the only suitor for BSX, were it to become clear that BSX was amenable to a sale. Covidien (NYSE: COV) could be a consideration and maybe Stryker (NYSE: SYK) would see that as a way of achieving some major diversification (although I highly, *highly* doubt that one).

Likewise, BSX would not be the only large target that JNJ could consider. Bard (NYSE: BCR), Becton Dickinson (NYSE: BDX), and CareFusion (NYSE: CFN) could all make sense (though BDX is quite a bit larger), as well as any number of fast-growing (and expensive) smaller companies like Nuvasive (Nasdaq: NUVA) or Thoratec (Nasdaq: THOR). Hell, even ZOLL (Nasdaq: ZOLL) could make sense and JNJ's salesforce could do amazing things with the LifeVest product.

Then again, maybe JNJ buys up a few more biotechs or takes a run at a big pharmaceutical company like Genzyme (Nasdaq: GENZ) or Lilly (NYSE: LLY). But then again, here is the precise problem playing the "who might buy who" game - once you get started, it's kinda hard to stop!

All in all, the safest bet to make in M&A speculation is that nothing happens. I think a JNJ-BSX deal *could* happen, and it probably would not be the worst deal that JNJ has made. But I'm still going to bet on the side that says JNJ won't be buying BSX any time soon.


Disclosure - I own shares of JNJ