
Stock in Focus: Johnson and Johnson
We’re upgrading Johnson and Johnson (JNJ) to a buy as it looks likely that the company’s long-standing talcum powder litigation suit is going to be settled for ~$9B. Law firms representing +70,000 claimants have agreed to the terms of the deal, which will largely clear the firm of the legal overhang that’s been hovering for the best part of a decade. JNJ has a market cap of +$411B – $9B is a relatively “small piece of the pie” to pay. We now view JNJ as relatively good value — it trades at 15x forward earnings and shareholders will be entitled to shares in JNJ’s consumer goods spin-off — effectively it’s a two-for-one deal.
We expect the spin-off to be executed near the end of the year. Shareholders will then own i) shares of a leading healthcare and pharmaceutical company and ii) shares of a company which owns such iconic brands which extend from Band-Aids to Listerine. We’ve looked at how healthcare spinoff Haleon has performed (among other things, Haleon makes Panadol and Sensodyne toothpaste) – Haleon trades at a premium (28x earnings) because of the stability of its brands and relatively large margins. If JNJ’s spinoff company trades in around the same place it will be valued around $26-30 per share, with the remaining pharma and medical company being worth $160 per share. In effect this implies the sum-of-the-parts value of JNJ is ~$190 per share, a premium to its closing price of $158.49.
New Zealand
The New Zealand market (NZX50, +0.5%) was up yesterday, after trading flat for most of the day and gaining after the RBA paused its interest rate hike.
Green Cross Health was the standout, its shares jumped +19% yesterday, after declaring a special dividend of 28 cents per share after revealing the sale of its community health division for $50m in February. We are hold rated on Green Cross.
Locally we await RBNZ’s interest rate decision today which is tipped to be another hike, analysts are split between 25 or 50 points. Commentary on future hikes is the major market driver.
Australia
The Australian market (ASX200, +0.2%) after the RBA left its rate on hold, at 3.60% which was widely expected. However, the RBA cautioned the market that its not over, and that further tightening of monetary policy may be needed to ensure inflation returns to target levels. We expect there would be room for 1 to 2 more hikes from the RBA over the near-term so would caution investors to remain defensive.
US
Other than JNJ a fairly slow news day in the US. The S&P fell 0.58% — just market chop on a data-light day. A chart of interest for you, though — inventories are looking large — they haven’t been as large since the oil embargo in 1973 (note the other times on the chart where inventories outweighed demand – the GFC and COVID). As always, we caution against using data on its own, but we’re reminded of the old addage “history never repeats, but it rhymes”.
