Great diversified business

OK, sorry, we have been backed up here with too many off days and too many results to cover properly at the same time. We had Q1 2014 numbers from JNJ on the 24th of April, which in trading terms is so far back that you cannot remember. Q1 sales when measured against the comparable quarter were 3.5 percent better at 18.1 billion Dollars, net earnings at 4.7 billion Dollars and EPS clocked 1.64 Dollars. The dividend had a few days prior been hiked by 6.1 percent to 70 cents a quarter. That is 2.80 Dollars a year, which means that at 100 odd Dollars the yield is easy enough to work out, not so? Earnings guidance for the rest of the year is in the range of 5.80 to 5.90, which means in the middle of the range the stock trades on a forward multiple of 17.1 times, with a yield of 2.8 percent. The earnings growth for the year is expected to be somewhere in the region of 11.8 percent. Relative to their peers, the company is afforded about the same rating.


The difference between JNJ and their "peers" as it were is that they are probably not an out and out pharma company, neither are they a consumer business. Nor are they a devices and diagnostics business. They are all of those things. In fact, in the last annual report the sales breakdown is 39 percent pharma, 40 percent devices and diagnostics and the balance, 21 percent is their consumer division. The acquisition of the business Synthes, an orthopaedics business has boosted the sales of the devices division specifically.


As Byron says, sometimes you need to have a pharma background to get to know these businesses intimately and understand specifically their pharma products, as well as an orthopaedics background to get a fair understanding of their devices and diagnostics business. The consumer businesses are a little easier, everyone can understand baby products (no more tears!), their skin and hair care products (Clean & Clear, Neutrogena to Piz Buin) as well as Listerine through to Band Aids, more commonly known as plasters around here. Throw in Acuvue and Visine, the shorter sighted folks would definitely know those ones! Easy enough to understand, right?

Without getting to know the blockbuster drugs (personally or reading reams of information) and in order to appreciate why 25 percent of sales are from new product releases inside of the last five years, you need to look at the Research and Development annual spend. Last year it was 8.147 billion Dollars on an annual revenue number of 71.312 billion Dollars. The year prior to that, in 2012, the company spent 7.665 billion Dollars on R&D on a revenue number of 67.224 billion. On both occasions R&D spend is approximately 11.4 percent of annual revenue. This will continue, and has to continue in order for the business to produce the NEXT blockbuster ahead of what is a very tough and competitive space.


But the margins are good, both in their core business and their newer businesses and having diversified more (Synthes), shareholders can expect more stable returns. Is this an exciting business however? Apart from a potential value unlock, with one or two parts of the business being floated (with the Merck announcement of them selling their consumer business to Bayer, it becomes increasingly likely that JNJ will consider doing the same) separately it remains a core part of a theme which we really like, healthcare. We continue to accumulate a great quality business.