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Johnson & Johnson Is Too Expensive

NEW YORK ( TheStreet) -- I didn't give Johnson & Johnson> (JNJ - Get Report) a strong endorsement heading into the company's second-quarter earnings report.

While I have always liked the healthcare giant, there was two things keeping from buying the stock with the own money.

First and foremost, I thought the shares were too expensive, especially since they were trading at a price-to-earnings ratio six points higher than both rivals, Abbott Laboratories (ABT) and Pfizer> (PFE).

Not to mention that the stock had already gained 30% on the year, so there was also the issue of value. I never believed in the idea of paying a premium for a stock when its peers are performing just as well, or even better, in some cases.

My second concern was with the company's lack of diversification.

I'm not suggesting that Johnson & Johnson is a one-trick pony. But while the company does have several highly regarded operations like orthopedics, medical devices, nutrition and (of course) drugs, it is the last that has provided all of the torque, while the other businesses have just skated by. And in this recent quarter, it was more of the same as the consumer business posted just 2% growth (in constant currency).

While the device business registered a solid 12% growth, there was also a lot of moving parts in that number. When taking a deeper look from an organic perspective, the device business posted an anemic growth of less than 2%, when adjusting out the contribution from Synthes, which Johnson & Johnson acquired last year.

This is not a situation where I'm trying to discredit the company for having made a timely acquisition. Management deserves plenty of credit for recognizing that Synthes was the right deal at the right time.

But for me to take a chance here on this stock, which already carries high expectations, organic growth details become increasingly important.

As have been the case, though, for the past several quarters, Johnson & Johnson was high in the drug business, as pharmaceutical revenue surged almost 13% year over year, which was enough to beat Street estimates by 4%. As with the first quarter, popular drugs such as Xarelto and Remicade were solid performers, with the latter up 10% year over year.

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