J&J’s Capstone #emba27

In 1886, Robert, Edward, and James Johnson founded Johnson & Johnson in New Brunswick, New Jersey. Initially, Johnson & Johnson produced wound care products such as bandages and sutures, and baby products.

Eventually, Johnson & Johnson was listed on the New York Stock Exchange in 1944. 3 years later, they acquired a groundbreaking company to produce sterile surgical sutures. Then in 1959, J&J acquired McNeil Laboratories, maker of Tylenol. Again, in 1961, J&J acquired Janssen Pharmaceuticals, a Belgian manufacturer of prescription medications. Subsequently, J&J has acquired many more companies, which operate in three divisions namely pharmaceuticals, medical devices, and consumer health.

Despite J&J’s continued acquisition and expansion drive, they have also focused on philanthropic initiatives. The company’s reputation increased greatly enhanced due to the support it provided during wartime and disasters, as well as HIV/AIDS and COVID-19 medication development.

How did the company perform over the past 10 years? Are there any improvements management can make? Is Johnson & Johnson a good company to invest in?  Let us attempt to answer these questions by analyzing J&J’s financial statements for the past 10 years.

Profitability

In 2012, J&J reported annual revenue of $65B. This increased steadily to $94B by 2021. This represents a compound annual growth rate (CAGR) of 3.38% over the 10 years. There was a decline in revenue in 2015 due to a sales decline in some products. In 2021, J&J successfully introduced STELARA to new markets including Europe, Asia, and Africa. This caused a substantial bump in revenue (13.55%).

The net profit margin was stable over the 10 years at an average of 18.15%. There was a temporary in the net profit margin in 2017 due to the impact of the Tax Cuts and Jobs Act (TCJA). This blinded-sided management when the SEC implemented it in the 4th quarter of the 2017 fiscal year. Notwithstanding, J&J still managed a 1.7% net profit margin in that year.

J&J also showed a consistent ability to generate profit from its assets. Over the 10 years, the average return on assets was 9.73%.

Capital Structure

J&J uses a mix of owner financing and non-owner financing (debt). Due to the implementation of TSJA in 2017, J&J debt rose unexpectedly by $13B causing a change in the debt structure. J&J successfully reversed the change in 2021.

Market Analysis

J&J shareholders enjoyed consistent returns on their investment over the 10 years. The company basic earnings per share averaged out at $5.17 for the period.

J&J also recorded an average return of equity (ROE) of 19.5% over the same period.

SWOT Analysis

J&J showed strength in some of the following areas. Revenue grew consistently over the period due to continued product and market expansion. Profitability was sustained throughout the period due to prudent debt management. Their market growth and performance were stable. They did not spare any expenses in their R&D and produced new drugs for both commercial and philanthropic distribution.

J&J showed weakness in some of the following areas. It grew at the same rate as a company in its mature phase. There were a lot of customer complaints about side effects from the use of their products.

J&J had opportunities to leverage the success of its COVID-19 vaccine success to expand its pharmaceutical products to other markets. They could also research and development products in the emerging robotic surgical systems. They could also acquire smaller biotech firms to shore up their growth.

A high legal exposure threatened J&J as a company. Many people threatened J&J with legal action. This led to settlements amounting to $2B in some cases.  Biotech companies were also developing drugs with fewer side effects compared to the ones produced by J&J. Consumers’ increasing awareness of the substitutes could lead them to stop using J&J products, in favor of the competition.

Recommendations to Investors

For investors looking to invest in Johnson & Johnson, I recommend buying and holding the stocks. The company has strong management at the helm of affairs. The company has experienced consistent growth and profitability. J&J’s 60-year profitability run remained unbroken despite large, unexpected tax liabilities. Lastly, they paid dividends to shareholders every year without fail.