No more tears: buy J&J shares

By Robert Walberg

Investors are very difficult to please these days -- just ask the folks at Johnson & Johnson (JNJ, news, msgs). The health care giant saw second quarter earnings jump 8.9% year-over-year to 98 cents per share on record sales of $13.36 billion.

Both numbers were slightly above Wall Street expectations. Management also reiterated its fiscal 2006 estimate of $3.65 to $3.72, which was consistent with the consensus forecast of $3.68.

Normally, when a company beats expectations and reiterates guidance the stock moves higher. Not today, not in this climate. Johnson & Johnson’s stock is off 88 cents, or 1.4%. Investors, in a very bearish mood, search for any negative and then focus on it.

Johnson & Johnson’s shortcoming was suggesting that this year's sales would grow by about 6%, at the low end of its previous range of 6%-8%. That’s about it. Sales, earnings and margin growth suggest that management is doing a good job of improving efficiencies in an increasingly competitive marketplace.

Increased competition and fears of price discounting clearly continue to weigh on the stock and the rest of the medical device industry. With today’s decline, Johnson & Johnson is now down nearly 6% over the past 52 weeks. By contrast, the S&P 500 is up about 1%. At least the company continues outperforming its competitors in the medical products space as Medtronic (MDT, news, msgs), St. Jude Medical (STJ, news, msgs) and Boston Scientific (BSX, news, msgs) are down by roughly 9%, 26% and 41%.

Getting over Guidant

Maybe it’s a good thing that Johnson & Johnson lost its bidding war with Boston Scientific for Guidant. Increasing its exposure in the hotly contested medical device market probably would have hurt its stock price even more due to worries that the price paid and stiff competition would depress profits and margin growth more. Sales in the medical device segment grew by 6.2% over last year and now make up about 39% of total sales.

Growth in the company’s pharmaceutical unit was a less-than-exciting 3.2%. Then again, big pharma has struggled to post solid growth in recent quarters due to the ever-present threat from generics. Johnson & Johnson’s pipeline is filled with several promising drug candidates, including treatments for rheumatoid arthritis, HIV and schizophrenia. On top of recent approval for Ionsys, a needle-free painkiller, and Remicade for treatment of pediatric Crohn's disease, this bodes well for the company.

Nevertheless, with the growth of generics and targeted drugs, the glory days for big pharma are over. Add the risk that politicians will try to reign in rising medical costs and this segment will continue to weigh on results going forward. Considering that the pharmaceutical unit remains the company’s largest at 43% of total sales, this is a real concern.

Building future business

It’s also a good reason why Johnson & Johnson opted to increase the size of its consumer products group with the recent acquisition of Pfizer's (PFE, news, msgs) consumer unit for a little over $16 billion. Though the price was steep, growth in this unit promises to be steady and strong. Adding Pfizer’s basket of high-profile products (Listerine, Visine, Benadryl and Neosporin, for example) creates an industry powerhouse with an impressive global reach. Last year the Pfizer unit posted sales of $3.9 billion, which will become a major component (25%) of Johnson & Johnson's consumer sales.

Management also made it clear in a conference call that it’s not done adding companies that will facilitate long-term growth. Expect at least another major run at a medical device company in the quarters to come. Maybe a high-growth addition like Intuitive Surgical (ISRG, news, msgs) would make sense. It’s good to know that management has no intention of resting on its laurels when it comes to bolstering growth and supporting shareholder value.

In today’s turbulent market stable, well-managed growth is worth a premium. Over the years, Johnson & Johnson has steadily delivered such growth and investors should take advantage of today’s weakness to add shares of this blue-chip company. I will add it to my Street Patrol portfolio as of Tuesday’s close.

Robert Walberg is a financial writer based in Chicago, Ill. He was formerly chief equity analyst at Briefing.com. He is a regular guest on CNN's Moneyline and CNBC's Squawk Box. Mr. Walberg ran for Congress in Illinois in 1994.