J&J's Consumer, Medical Device Businesses Will Drive Growth

Analysts are optimistic about Johnson & Johnson (JNJ) - Get Report following the company's consumer and medical device review day yesterday.

J&J could be a good buy for investors looking for a low risk stock that is likely to see some major growth over time, analysts say, although they disagree on whether it's currently priced at an attractive level.

"Strategically they've got a lot of good assets in their consumer and medical device division," analyst Damien Conover of Morningstar said in a phone interview. "It's up for some steady low growth going forward given the different channels of products and cash flow being driven from those channels. It's a less volatile stock than others."

Conover said, though, his model finds the stock somewhat overvalued at this point, despite being relatively low-risk and stable.

Others, like Kristen Stewart of Deutsche Bank believe the stock is a definite buy even at its level, thanks to the company's assets.

Johnson & Johnson's shares have been rising steadily since late January, though at around $112 per share, they lost 1% of their value yesterday. The company's market cap is $309.06 billion.

At the company's May 18 event, Johnson & Johnson's CEO Alex Gorsky noted that the company has plans to grow its healthcare business by expanding its technology offerings.

"We have the right internal capabilities, and are developing strategic partnerships in health care technology, to reshape the way healthcare is delivered, managed and experienced," said Gorsky in a press release.

According to analyst Joanne Wuensche of BMO Capital Markets, Johnson & Johnson is working to integrate technology in its healthcare business, like cloud management and analytics to better understand patient trends.

"The 'health tech' space seeks to combine healthcare and technology with a smart, secure digital business while developing smart products that learn," Stewart wrote in a note. "JNJ has an annual tech investment exceeding $2 billion and released 450 apps last year."

According to Conover, hospitals are taking the bait.

"I think as hospitals are adapting to the Affordable Care Act, they like to focus on less vendors and create more value that way," Conover said.

As for the consumer side of the business, Wuensche said the company is looking to grow.

The franchise currently houses 12 mega-brands, including three brands with over $1 billion in annual sales and it expects to add five new brands with $1 billion sales by 2020, she observed in a note. To reach this goal, Wuensche added, J&J is shifting R&D and project development toward fewer, but larger products." The idea, she continued, is "to maintain its global leader position across its product segments."

Drivers of growth within the company's consumer segment, which accounts for 19% of its sales OKAY?, include its contact lens business, Acuvue, and a patch the company developed for diabetes called OneTouch Via, which is expected to launch in the next twelve months.

The company also expects to see steady growth in its medical device business. According to analyst Danielle Antalffy of Leerink Partners, Johnson & Johnson sees the medical technology market growing between 4% and 6% through 2020, higher than Leerink predicted for that same time period.

The company has been restructuring its medical device segment, which accounts for 36% of its sales, to simplify and sharpen its marketing efforts. The effort has seen the number of brands under its medical device umbrella fall from 16 to 3 since January. 

"What remains is a leaner company with more product firepower, with the goal to have customers talk with 'one empowered person' about all of their product needs, becoming the ultimate bundling package," wrote Wuensche in a note.

Though this division hasn't done a particularly large deal, Wuensche pointed out that it has kept up a stream of smaller tuck-ins, including the company's acquisition of Nu-Wave Medical, which closed in the middle of April. And analysts expect that stream to continue and perhaps lead to bigger acquisitions.

"More acquisitions are likely," Conover said. "They have a strong balance sheet right now. Since they're so diversified, they could go into a lot of different areas. With their cash as strong as it is, I think they can get into a midsize deal relatively easily."

According to Stewart, the company has said it wants to grow through acquisitions in its over-the-counter, beauty and baby care businesses, while also capitalizing regional and country specific opportunities. It will also consider licensing deals and partnerships.

Johnson & Johnson could not immediately be reached for comment.