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Tuesday, October 17, 2006

J&J For A Slowing Economy

By Yaser Anwar, CSC of Equity Investment Ideas

Healthcare behemoth Johnson & Johnson is a great pick for riding out a slowing economy, says Barron’s.

The article cites J&J’s diversification in three separate sectors of the health care industry: prescription drugs, devices and diagnostics, and consumer health care. J&J owns well-known brands such as Band-Aids, Tylenol and will soon add Lubriderm and Listerine thanks to an acquisition of Pfizer’s consumer health care unit.

Matthew D. McCormick, portfolio manager at Bahl & Gaynor, points out to Barrons that even in the event of a recession consumers will need to buy the "bare necessities." McCormick calls J&J, "a diversified play on almost every health care product out there."

Barron’s also points out that J&J is looking expected to deliver solid earnings for an established company. J&J is expected to earn $10.9 billion, or $3.69 a share this year, a 6 percent gain from last year’s $3.49 a share. According to Barron’s, analysts are looking for earnings of $4.01 in 2007 and $4.28 in 2008.

J&J trades at an historic multiple of 19.4 times forward earnings and is selling at just 16 times future earnings, says Barron’s. It also has a lower multiple than many of its competitors. It's current price to cash flow ratio of 15 is also lower than its historic average of 18.

"When you see a company with a pretty good franchise in three areas trading at low historic values … it’s opportunistic to buy it," George Foley, manager of large-cap and core value portfolios at Glenmede, tells Barron’s. Glenmede holds stock in J&J.

Based on these valuations, J&J’s stock could be worth $77 a share, says Citigroup analyst Matthew Dodds. That would be a 19 percent gain over its current share price of $64.80.

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