J&J is now too expensive

9 Mar 2013 by Jim Fickett.

J&J is priced for continued high growth, but a long trend in rising profits has been broken, and there is little evidence that strong growth will come soon. I will probably sell on Monday, with a capital gain of about 30%.

There was more news today about J&J's defective products (Damages awarded in J&J's DePuy hip implant case), which caused me to do a quick checkup. The long trend of increasing earnings was broken in 2011, and 2012 does not look much better:

The big dip in free cash flow in 2006 was due to the acquisition of Pfizer consumer healthcare; otherwise free cash flow confirms the net income numbers. Over the last 6 years, after the large acquisition, net income averaged $11.6bn, and free cash flow averaged $10.2bn. That gives a P/E of about 19 and a P/FCF of about 21.

That is quite expensive, and the current price only makes sense if you believe the company will continue to grow strongly in the future. Maybe it will, maybe it won't. Considering that (1) Europe is in recession, the US might or might not be in a stall, and China and Brazil are running on fumes, and (2) the company is paying now for the poor quality control of past years, I don't think strong growth in the next few years is even likely, much less a good bet.

So the price looks very high to me and, unless something surprising happens in the interim, I will sell on Monday. I bought at about $60, and the closing price on Friday was $78. So in addition to the healthy dividend, I am currently sitting on a capital gain of about 30%. Maybe I'm missing out on a further rise, but that is an ok profit to my way of thinking.