JNJ's Success Story
Board: Value Hounds
JNJ sells clinical diagnostic business for $4B to Carlyle as expected:
As JNJ nears the $100/share mark and a possible symbolic split it is perhaps a good time to reflect on why this company has done so well over many years with a stock that has nicely beaten the S&P 500 over 5 yrs., 10 yrs. and with even larger beats if you go back further. I think today's news hits on one of the key points of success, getting out of second rate businesses, raising cash to re-invest in better businesses.
I started with JNJ in 1984 and retired in early 2008. Over that time and since I have seen JNJ do many things well and also make many mistakes. One thing that is striking is how different the business portfolio is today vs. 1984, 1994 or even 2004.
I think the key reasons for this company's superior success lie mainly in these points:
- having a company mission./philosophy of addressing key human healthcare news, always seeking superior solutions. But the company has never married itself to any single product or technology (unlike for example Kodak with film.)
- focusing on high margin businesses that are number one or number two in sales in each specific business area
- looking broadly to find the best solutions to human healthcare needs both externally and internally. On this point I would have to say that JNJ has done far better doing this through acquisitions rather than R&D.
- selling unsuccessful and declining businesses.
Doing this, JNJ has been able to maintain a diverse portfolio of ever changing excellent businesses. It has been able to do this in a "smooth" manner. This "smooth" success has helped it retain smart, capable employees. Working for JNJ does not provide the opportunities for spectacular wealth that one might get at a biotech start-up, but historically key employees have done very well. JNJ has also to a large extent continued the philosophy of quasi-independence for its operating companies. This has been a selling point when JNJ does acquisitions and a superior way of maintaining key elements of the acquired company and key personnel. Perhaps it has led to some problems with rogue operating company action in a few instances but overall it has been a strong positive in my view.
In investing we are always left with the problem of new vs. old. Investing in companies with only the promise of future revenues and earnings entails substantial risk. Buying shares in companies with old and possibly declining businesses can often lead to bad results. Finding companies like JNJ that manage to do an excellent job of "ever-greening" can be an excellent way to go.
I do not think JNJ is tremendously cheap at the current price. I have been happily cashing my incentive options (that near expiration) at these prices, but I also retain a chunk of shares, with good confidence of decent future returns.