Should Johnson & Johnson (NYSE: JNJ) Split up?

January 09, 2015, 14:25 pm ET, BY Barry C.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Back in the 1920s there was a call to “Break up the Yankees,” the reasoning being that no team could compete with the duo of Babe Ruth and Lou Gehrig, as well as the other sluggers who dominated the Bronx Bomber lineup.

In the milieu of the business world, splitting a corporation into several separate companies is sometimes recommended as away to unlock shareholder value, a flip side to the axiom that the whole is greater than the sum of its parts. Back in 2012, Goldman Sachs Group Inc (NYSE:GS)  suggested the Dow stalwart Johnson & Johnson (NYSE: JNJ) consider splitting into three companies -- pharmaceuticals, consumer-products and medical-device companies. Goldman suggested the move would generate higher returns than J&J as a diversified giant.

At the time, J&J was trading at about $62 a share. Goldman set a “conservative” post-split target price of $76, offering that the standalone units could generate more growth alone.

Of course, management at the 130-year old J&J didn’t get this far listening to every piece of advice that came along. Today the company’s shares trade at just more than $106, up more than 70% from where they were at when Goldman tossed out its idea.

Times have changed, though. And while we’re not necessarily resurrecting the idea of a breakup, it’s not out of the question. Several of J&J’s Big Pharma rivals have narrowed their focuses recently. We’re just suggesting a copycat move might be necessary to boost J&J’s prospects, at least over the next year or two. Otherwise it might be the time for investors to cash in their chips on the stock and look elsewhere to place their winnings.

First, from a macro standpoint, the dramatic oil price drop and the headwinds created by the prospect of slowdowns in several of the major economies outside the United States may make the overall market somewhat dicey. And with its exposure in Europe, Asia and key emerging markets, J&J also has currency risk at a time when the strong dollar could be weighing on sales in those areas.

And certainly J&J can’t be counted on to avoid the higher level of market volatility being forecast.

Then there’s the question of just how much more oomph is left in J&J?  Fourteen analysts who were polled estimate company revenues will eke out a meager 1% percent gain in revenues in 2015, although earnings are forecast to climb a somewhat more respectable 3.5%t. The stock is valued at 17 times expected 2015 earnings, just about in line with Dow and non-tech S&P 500 stocks. That begs the question: where is the impetus for any share price boost going to come from?

On the plus side, J&J shares yield a nice 2.7% return on its dividend. Adding to its longer term outlook, the company is one of the biggest R&D spenders in the industry. Recently, J&J grabbed headlines when it announced its Janssen Pharmaceutical Companies unit is developing an Ebola vaccine together with Bavarian Nordic. This would probably be more of a humanitarian addition to J&J’s product line than a meaningful addition to sales and earnings. 

J&J is participating in the 33^rd Annual JP Morgan Health Care Conference on Monday, Jan. 12, in San Francisco. Perhaps management will provide some information that will make investors more optimistic about the company’s short-term prospects.

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