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In Focus: Johnson & Johnson


Thanks for checking out this weeks In Focus, our weekly look into a company that made Wall Street's news cycle. This week we take a look at Johnson & Johnson.

On Friday Reuters released an incredible investigative report linking Johnson & Johnson's Baby Powder to asbestos and cancer patients. This was a damaging report for Johnson & Johnson, the company's stock sold off heavy in Friday's session, losing 10% of its value. 


New Old News The story of baby powder's link to cancer has made the news cycle a few times over the past several years; but the Reuters report suggests that JNJ was aware of the baby powder cancer connection but chose to work around it. As of December 31, 2017, JNJ had 6,610 plaintiffs with alleged injuries related to body powders containing talc according to the company's 2017 annual report. This may not have been common knowledge, but it was no secret.

Johnson & Johnson has denied the allegations that its product is responsible for causing cancer, but its public denials mean nothing, this is going to be played out in the courts and possibly for years to come. Mesothelioma, the illness suffered by one of the first plaintiffs to bring an action against J&J can take years after exposure to surface.

The Reuters' report points out three verdicts against J&J already. One in New Jersey, another in California, and a third in St. Louis where $4.69 billion was awarded in damages.


Blue Chips of all Blue Chips

As an investment Johnson and Johnson has been solid. It suffered a selloff early in 2018, dropping from around $148 per share in January to around $118.00 per share in May. Since then it's been on the rise, even hitting that $148 high again. The stock is underperforming the S&P 500, but investors don't invest in JNJ to get rich overnight, it's more of a minimally powered savings account, which is better than a banks no-powered savings account.


A quick review of JNJ's numbers leaves me with a love-hate-tolerate feeling towards the company. I love the increasing revenue and dividend per share, I hate the increasing debt and the decrease in cash, cash equivalent, and short-term investments, and I can tolerate the somewhat up and down but mostly stable free cash flow. But how will this new old news effect the company moving forward? The quote below from the Reuters gives us an idea of the JNJ's exposure to talc based products.

J&J, based in New Brunswick, New Jersey, has dominated the talc powder market for more than 100 years, its sales outpacing those of all competitors combined, according to Euromonitor International data. And while talc products contributed just $420 million to J&J’s $76.5 billion in revenue last year, Baby Powder is considered an essential facet of the healthcare-products maker’s carefully tended image as a caring company – a “sacred cow,” as one 2003 internal email put it.


A look into Johnson & Johnson's 2017 annual report and the Q3 2018 filing shows decreasing sales in Baby Products. Is this an accident or a trend? According to the Reuters report the earliest mentions of impure Johnson & Johnson talc came in 1957 and 1958 from a consulting lab. I can't tell you how public or accessible information was in the late '50s, but we are in the era of the "woke." This report will make the rounds and sales of baby powder will be effected, even if just temporarily.

Crisis to Crisis to Crisis

We've seen crisis before in the stock market, so this is no shock, but how will JNJ's stock react? In September 2017 Equifax's (EFX) data breach became a big public crisis that caused Equifax's stock price to drop 52% in two days after the company announced the breach, even hitting an $89.59 per share low. However, to investors the crisis was short lived, and by January 2018 the stock was trading above $120 per share.


Even further back we had the Lumber Liquidator's crisis. In February of 2015 Lumber Liquidators (LL) stock looked as if it would trade above $70 per share. When word got out about a scathing 60 Minutes piece that was set to air, the stock dropped 32%. The 60 Minutes piece aired March 1, 2015, claiming that Lumber Liquidators knowingly used Chinese made laminated wood flooring, which contained elevated levels of formaldehyde.


The Monday following the 60 Minutes story Lumber Liquidators dropped another 33%. The elevated formaldehyde levels were a safety and health issue, emphasis on health. Lumber Liquidators never recovered and the stock trades at $10.03 per share as of this writing.

Which one will Johnson and Johnson be? If I had to guess I would say JNJ's stock will be more like Equifax, because talc products represent a small portion of the overall business. Whereas wood flooring made up 57% of Lumber Liquidators sales mix in 2014. 


A Wayback Crisis

Johnson & Johnson has dealt with crisis before. In 1982 in the Chicago metro area Tylenol branded pain medicine was laced with potassium cyanide, and it resulted in seven death, and several other deaths occurred from copycat acts. JNJ established relationships with the Chicago PD, the FBI, and the FDA in dealing the crisis, and received positive coverage for their response to the issue. How Johnson & Johnson's handled the issue has become a case study for Crisis-Management teaching, but can they do it again? 

To Buy or Not to Buy

JNJ at the right price is a great add to any portfolio. Again, not a high flier, but stable and consistent, a nice solid investment to hedge against more speculative investments in a portfolio. However, just off of the Reuters report this seems like The World versus Big Tobacco again. In that issue the Tobacco Master settlement was $200 billion plus, which was to be paid out by Big Tobacco over 25 years. We could see something similar with JNJ if enough guilty verdicts pile up.

The good news for investors is that talc related products represented only less than 1% of total revenue for JNJ last year according the quote cited earlier; and in other good news, but in a sad sick way, the issue with mining talc is that it appears to come with traces of asbestos which can't be filtered out 100%. So it is likely that other companies that sell talc based powders will have to deal with the same issues as JNJ. So we won't see a competitor rise while JNJ falls.

And for JNJ, the association between asbestos, mesothelioma, and ovarian cancer has seen mixed results in court, even though there is years of science making the connection. JNJ has maintained their innocence and believes the connections made between Johnson and Johnson's Baby Powder, asbestos, and cancer is "junk" science.


There is value in Johnson and Johnson, but not at this price, even after Friday's 10% drop it's still not for me. My interest will ramp up the closer the stock price gets to $100 per share. Not predicting that it will get as low as $100 per share, but the closer to that area the better. My thoughts are Hold it if you've got it.

The Read

If you feel like you've got to have it, that you need to own Johnson and Johnson's stock, the read is public sentiment and investor sentiment, understand they are not the same thing and rarely do they align. In the Equifax case, consumers were still upset months after news of the data breach, investors felt $90 per share for Equifax was a bargain and accumulated shares heavily making big profits while the public stewed in anger. You want to buy Johnson and Johnson when the smart money starts accumulating shares.

That is where I leave you this week, with a HOLD recommendation on JNJ. Thanks again for reading and may your next investment be your best investment.

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The Seville Report is our attempt to bring world class investment research to people who feel world class investment research isn't available to them. We also want to demystify the stock market for people who wouldn't think of putting their money in the stock market. Our research comes quarterly via our newsletter, The Seville Report. We use the website and this blog to share thoughts and ideas about the markets and different companies.



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