JnJ 3Q numbers and share buyback

As far as we are concerned, the most important company related news yesterday were numbers from Johnson & Johnson. First came the announcement that the company were embarking on a 10 billion Dollar buyback program, which is around 4 percent of the shares in issue at the current share price. This is a sizeable business, not too different in market capitalisation to the two behemoths above, with a market cap of 262 billion Dollars. The business consists of three divisions, a consumer facing business with all the names that you will be familiar with and then the pharma business, with a recently larger and bolted on devices and diagnostics business.

Sometimes, and bear with my whilst I use a cricket analogy, sometimes owning JNJ is like being in Gary Kirsten's camp rather than a dasher like Daryll Cullinan. Gary ended up with more runs and more games than Daryll, it just seemed like poetry flowed from the bat of Daryll. Perhaps a sporting analogy is lost, in this case of JNJ, form is temporary and class is permanent, having lasted 130 years. At the moment, as a shareholder of JNJ over the last 2 years it seems like we have been scratching for runs, the stock is up just shy of 7 percent relative to a market which is up nearly 18 percent over that time. The underperformance has meant that there has been scrutiny placed at the doors of the selectors and coaching staff alike. And by that, I mean us who recommend the stock and management who run the business.

Again, like many multinationals listed in the US and doing business around the world, the strong Dollar has hit revenues, equally however sales in the home base were lower. On an operational basis, adjusted diluted earnings grew 1.2 percent (that is stripping out the currency). In the US the consumer division was all good, unfortunately the other two business segments dragged overall sales lower. On the earnings conference call (you have to signup, it is free however) the medical devices chairman, Gary Pruden, suggested that their division is seeing global growth rates at around 4 percent. And as he points out JNJ are the leader, indeed this as a standalone business would be one of the biggest in the world. He said something that resonated with me:

The World Health Organization estimates that nearly a third of the world's global disease burden could be addressed through surgery. Yet nearly 5 billion people continue to lack access to safe, timely and affordable surgical care.

I spoke to a client the other day who said that her 87 year old husband had a new lease on life with all the replacement parts in his body, and was now able to lead a much more active lifestyle than before. And that is what the diagnostics and devices business is meant to be, with all the technology that abounds (smart devices), it will create longer and healthier experiences for all of us. Having said all of that, adjusted EPS sank to 1.49 Dollars, down 7.5 percent, which is the currency headwinds. Tom Lee, a favourite of the bulls on Wall Street suggested that all these negative Dollar headwinds could unwind to Dollar tail winds in the second quarter next year, I am not a fan of currencies working for or against you, it is what it is however.

So why would you continue to own and even accumulate a business of this size and scale? If you believe that you want to own possibly the bluest of them all, as far as blue chips are concerned, then this is no doubt the company for you. You may consider the company staid and unexciting, yet in the last quarter they spent over 12 percent of revenue on research and development, always searching for the next blockbuster. Changing lives, one at a time. On a historic multiple of over 16 times the stock is not cheap relative to their recent growth rates, the fabulous underpin of the 3.14 percent yield (pre-tax) should put a floor in. Whilst there is no great hurry to buy them before they see the effects of the currency unwind and turn in their favour, this is a company that you must always own. Accumulate on weakness.