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Investors Are Letting J&J Off Easy

Published: 27 Oct 2010 22:12:29 PST

October 21, 2010

Johnson&Johnson hasn’t exactly been what you would call a good corporate citizen lately. But investors don’t seem to mind. Shares of the healthcare giant are currently trading just 6% off their 52-week high. They are actually slightly higher now than they were about five months ago, when the company’s recall problems first came to light.

J&J has been criticized in recent months for how it handled the recall of many of its popular over-the-counter of drugs, particularly a so-called “phantom recall” of Motrin last year. E-mails obtained by Congress show that J&J’s McNeil unit had a subcontractor buy Motrin from drug stores without informing customers there might have been a problem with the product.

CEO Bill Weldon testified in front of a House panel recently to explain the firm’s actions and conceded that the company “let the public down.”

It’s really something that J&J has not been punished by Wall Street. Other “scandal” companies from this year have gotten crushed by investors, especially after leaders subjected themselves to a Congressional dog-and-pony show. Just ask anyone who owns shares of Toyota, Goldman Sachs, Massey Energy or BP.

To be fair, there is probably one very compelling reason why the J&J recall woes have not led to a massive sell-off in the stock. When I last wrote about J&J in early May, several fund managers and analysts noted they thought investors and consumers were willing to overlook J&J’s problems because there were no reports of consumers getting sick from the recalled products. And that still appears to be true. So, in one major respect, J&J can’t be fairly compared to the BP and Massey incidents, in which people died as a result of accidents.

J&J defenders also pointed out that the company has historically done such a great job of crisis management. The example of J&J’s response to the Tylenol cyanide scare in 1982 was cited more than once. But that was a different management team handling the company’s response. Why should the current J&J regime still enjoy the goodwill that was generated nearly three decades ago?

Parija Kavilanz has done a ton of investigative reporting about the recall and has uncovered some troubling patterns. Yet, J&J investors still don’t appear to be all that concerned. Warren Buffett’s Berkshire Hathaway even increased its stake in the company in the second quarter. As callous as it may sound, investors are looking at the dollars and cents, and they’re coming to the conclusion the recalls will have only a minimal impact on the company’s bottom line.

Tylenol, Motrin and other consumer products that are part of the McNeil division are just a small part of the healthcare conglomerate, which also has sizeable pharmaceutical, biotech and medical equipment divisions.

“Of course you don’t like to see negative news like this. But, at the same time, it helps to have a lot of other products to make up for the ones that are struggling,” said Tom Forester, manager of the Forester Value fund in Libertyville, IL, which owns a position in J&J. “The beauty of J&J is that it’s so large and is so diversified.”

Forester added that J&J, trading at about 12 times 2011 earnings estimates, isn’t a sexy growth stock. Many of its investors are buying it for the long-term and not trading it like a high-tech momentum stock.

Kent Gasaway, a portfolio manager with the Buffalo Funds in Kansas City, which also owns J&J, agreed. He said his firm invests in companies with at least a three-to-five year horizon, and he’s not spending too much time thinking about whether the recall problems will have a long-lasting effect on the stock.

Gasaway and Forester also added that unlike BP, there are no worries that J&J will need to cut its healthy dividend, which currently yields 3.5%. “J&J has many strong franchises and a good balance sheet, and that helps it to weather the storm,” Forester said.

So it may seem strange that investors are not all that upset about the phantom recall issue. But as long as the company’s overall sales and profits aren’t at risk, J&J stock is likely to remain a Wall Street favorite.

 source: ASQ

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