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Analyst Upbeat on J&J, Baxter

The companies could see solid results in 2006, Mike Weinstein of J.P. Morgan says.


Johnson & Johnson

(JNJ) - Get Johnson & Johnson Report


Baxter International

(BAX) - Get Baxter International Inc. Report

, 2006 appears to hold plenty of promise, according to one analyst who follows the companies.

Mike Weinstein, a medical technologies analyst at J.P. Morgan, says investors have perhaps focused too much on J&J's

planned acquisition of medical-device maker



and might be forgetting the company's bundle of cash and drug pipeline.

Regarding Baxter, some of the poor management decisions of recent years are being rectified. "Baxter is in our view a turnaround in progress, with 2005 earnings growth of 12%-plus reversing two consecutive years of

earnings-per-share downturns," according to Weinstein.

He says Baxter could "comfortably surpass its peers," possibly hitting double-digit revenue growth by the end of this year.

Weinstein, whose firm has provided investment banking services to both companies, upgraded shares of J&J and Baxter to overweight from neutral.

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Setting aside the Guidant drama for a moment, J&J stands to benefit from as many as seven drug candidates that are up for market approval in the not-too-distant future. In addition, J&J has a cash hoard of around $15.2 billion, and it has the potential to generate $10 billion more this year, Weinstein believes.

Needless to say, the health care giant has the resources to make multiple acquisitions this year, should it choose to go that route.

Among the products Weinstein expects to be up for regulatory clearance by next year are the painkiller Ionsys, Dapoxetine for premature ejaculation, HIV drugs TMC-114 and TMC-125, the schizophrenia drug Paliperidone ER and Yondelis for a type of cancer called soft-tissue sarcoma.

Weinstein adds that even without Guidant, J&J is worth owning, particularly in light of its cash position. On top of that, J&J could reach 10% earnings growth in each of the next three years, Weinstein wrote in a research report.

The Guidant matter dates back to December 2004, when J&J agreed to buy the company for $76 a share. After a series of Guidant product recalls prompted J&J to threaten to back out of the deal, the sides renegotiated a pact worth a little more than $63 a share. For now, that plan appears to be progressing, but

Boston Scientific

(BSX) - Get Boston Scientific Corporation Report

has a $72-a-share offer on the table for Guidant.

J&J shares trade at 16 times projected 2006 earnings, and is on par with its peers in the pharmaceutical sector, Weinstein says. He expects the company to achieve 6% revenue growth for the year. Shares were up $1.53 to $61.63.

Meanwhile, hospital-supplies company Baxter International is a "turnaround in progress," Weinstein says, and the company's management has done all the right things to restore investor confidence, clean up the company's balance sheet and improve product pricing, costs and tax matters.

Although the stock was hit in July when the company

recalled one of its infusion pumps and has generally struggled in the past 18 months, it might still be worth nibbling at, Weinstein says. Baxter, whose 52-week range is $33.08 to $41.07, rose 71 cents to $38.36.

Sales of the Colleague infusion pump should resume this summer, and revenue growth is expected to accelerate over the course of the year, ending up about 10% and sending Baxter's share price on an upward path, the analyst expects.

"That said, we note that management may still have other levers (e.g. margin expansion and a falling tax rate) it can exercise should Colleague's comeback take the full year," Weinstein says.

Weinstein expects Baxter to report earnings of $2.10 for the full year, while the consensus estimate for 2006 earnings is $2.16.

On the whole, medical technologies have been in a funk since mid-2004, but Weinstein expects conditions this year to be much more favorable.

Since the

Federal Reserve

started raising rates in the summer of 2004, mid- to large-cap medical technology stocks returned 9% vs. a 10% return for the

S&P 500

, Weinstein wrote.

He expects a choppy performance for the group through the first one or two quarters of this year, but once the Fed stops raising rates and implanted defibrillator sales strengthen, the sector should have the opportunity to improve. Sales of defibrillators and pacemakers, especially Guidant's, have been of course hampered by recalls in the last year.