At $104, J&J shares are up nearly 14% in year-to-date gains. So there's very little to complain about -- especially since the stock is outperforming the health care sector's 11% gain, according to Morningstar.
Still, there are plenty of investors calling for Johnson & Johnson to break itself up into smaller pieces, even though the company is posting 9% year-over-year revenue growth. By contrast, rivals Covidien (COV) and Novartis (NVS) , which are smaller, are posting growth of 4% and 3%, respectively.
The way I see it, given Johnson & Johnson's roughly $300 billion market cap, investors should be happy. Not only is Johnson & Johnson outperforming beating equal-sized rivals like Merck (MRK) and Novartis in gross margin, the company is also growing the top line quicker than smaller players like Covidien and Pfizer (PFE) .
What's more, Johnson & Johnson stock is trading at a price-to-earnings ratio of 19. That P/E is five points lower than the industry average, according to Yahoo! Finance. With Johnson and Johnson's revenue growth having more than doubled those of Covidien and Novartis, it makes no sense for either company to command P/Es of 25 and 23, respectively.
Why break up the company when Johnson & Johnson is delivering more revenue growth and higher margins? It makes no sense. By that standard alone, the shares, which are trading at just 16 times 2015 estimates, according to Yahoo! Finance, makes Johnson & Johnson is one of the best bargains in Big Pharma.
With management's focus on shareholder returns, things are only going to get better.
Johnson & Johnson's growth prospects and ongoing improvements should push the stock towards the $120s in the next 12 to 18 months despite the sluggishness in devices. The company's strong drug business, which is growing at more than 20% year over year, has more than enough firepower to carry the devices business for the next several years.
The company's top drugs such as Remicade, which accounts for roughly 20% of its pharmaceutical sales, are growing a high single digits. Equally impressive, the company's prostate cancer drug Zytiga and Xarelto, used to treat blood clots, are growing at 42% and 91%, respectively.
When you factor in the 135% jump of new drug Olysio, which is used to treat Hepatitis C, there are very few drug portfolios that can match J&J's. With such a dominant performance in drugs, who cares about medical devices.
The company is doing what it has to do to grow the bottom line. With more than $30 billion in cash on the balance sheet and another $19 billion in operating cash flow, Johnson & Johnson has enough liquidity and financial muscle grow any segment it wants.
From that perspective, if the devices business is weak it's because management doesn't believe there are any worthwhile investments and/or acquisitions to shore up that business. It's likely a market the company doesn't believe is worth pursuing.
Given the company's strong internal pipeline and solid balance sheet, management deserves the benefit of the doubt. With meaningful improvements made each quarter in areas like orthopedics and cancer treatments, investors should be patient, collect the 2.80% yield and allow Johnson & Johnson to operate.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates JOHNSON & JOHNSON as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate JOHNSON & JOHNSON (JNJ) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, increase in stock price during the past year, growth in earnings per share and increase in net income. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results." You can view the full analysis from the report here: JNJ Ratings Report