Johnson & Johnson Stock Up 4% Today – Time to Buy JNJ Stock?
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The price of Johnson & Johnson stock is up 4% in pre-market stock trading action today following news that the company will split into two separate businesses as part of an effort to make its huge businesses nimbler and more adaptive to the evolving needs of its respective markets.
According to a press release, a new consumer health company will be formed as a result of this split. This business will own and commercialize top brands from Johnson & Johnson including Aveeno®, Neutrogena, and Tylenol. Sales for this unit are expected to end 2021 at approximately $15 billion.
Meanwhile, the new Johnson & Johnson will focus on the pharmaceutical and medical equipment segment of the company and expects to produce approximately $77 billion in revenue by the end of 2021 – excluding vaccine sales.
Alex Gorsky, J&J’s current Chief Executive, will transfer his role to Joaquin Duato effective on 3 January and will remain the Executive Vice Chairman for the new Johnson & Johnson. It is still unclear who will be leading the soon-to-be-split health care business.
The transaction is expected to qualify as a tax-free business separation and should be settled in the next 18 to 24 months. Goldman Sachs (GS) and JP Morgan (JPM) will be advising the business for this particular endeavor along with Cravath, Swaine & Moore and Baker & McKenzie who will be acting as legal counselors.
A conference call from Johnson & Johnson will be held later today to provide further details about the transaction and what does it mean for the future of Johnson & Johnson stock.
Market participants appear to be reacting positively to the news as indicated by this pre-market uptick.
Can this development push the price of Johnson & Johnson stock higher in the next few weeks? In this article, I’ll be assessing the price action and fundamentals of the company before it splits to outline plausible scenarios for the future.
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Johnson & Johnson Stock – Technical Analysis
Today’s pre-market jump is a bit encouraging for the short-term outlook of Johnson & Johnson stock as the price would be breaking above the stock’s short-term moving averages if the move spills over to the live session as is.
The stock has been on a steady uptrend since March this year as COVID vaccine sales have improved the financial performance of the business recently. Today’s jump will possibly catalyze a move to the upper bound of the price channel highlighted in the chart as long as market participants continue to perceive the decision to split the company as a positive development.
Both the Relative Strength Index (RSI) and the MACD are hovering near bullish territory with the former standing at 48 while the latter has just turned positive.
Moving forward, a move toward the $180 level seems plausible as long as today’s session ends up breaking above JNJ stock’s short-term moving averages. This would result in an upside potential of around 10% based on yesterday’s closing price of $163 per share
Johnson & Johnson Stock – Fundamental Analysis
For once, Johnson & Johnson announced that its current dividend will remain unchanged after the split. The firm’s dividend yield currently stands at 2.6%.
As to how attractive the transaction is for existing and prospective stockholders, more details are needed to see how many stocks of the new health care company will be extended to JNJ’s current shareholders.
By the end of 2019, before the pandemic, the consumer health segment produced $2 billion in pre-tax income to the company while the pharmaceutical and medical devices segment generated nearly $16 billion. Sales for the consumer health segment for that period ended at $14 billion while the remaining two segments produced around $68 billion.
Those figures are particularly similar to the ones produced by the business by 2015. Back then, the consumer health unit produced $1.8 billion in pre-tax income while the other two segments generated around $18.5 billion for the company. Sales for the consumer health business were $13.5 billion back then while the other two segments produced $56.5 billion.
It seems that, from the two, the pharmaceutical and medical devices business is the most appealing in terms of growth as both sales and earnings from the consumer health segment have been stalled for years.
Meanwhile, the consumer health unit is facing some legal issues concerning allegations that its baby powder contains cancer-causing agents along with some other prominent legal claims.
The legal and advisory costs resulting from this transaction could be quite large for Johnson & Johnson and may affect the firm’s operating income in the near future along with the cost of legal settlements if the outcome from these lawsuits is unfavorable.
Considering the relatively stalled figures produced by the two businesses in past years – excluding COVID vaccine sales – there are not many reasons to believe that this corporate break up will have a positive effect on the firm’s financial performance or at least not until the management proves otherwise.
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