For Johnson & Johnson, Lawsuits, Not Earnings, Are The Pain Point

  • Reports Q4 2018 results onTuesday, January 22, before the market open
  • Revenue Expectation: $20.17 billion
  • EPS Expectation: $1.95

Even if Johnson & Johnson (NYSE:JNJ), the world’s largest maker of both consumer and pharmaceutical health care products, delivers a blowout quarter when they report Tuesday, investors might still not be delighted. A massive beat won’t overshadow the biggest worry currently stalking stakeholders: the outcome of litigation brought by nearly 12,000 plaintiffs over the company’s baby powder and other talc products. The complainants allege that asbestos in those Johnson & Johnson products caused their ovarian cancer.

The company paid a steep price during 2018 because of these claims. In July, a jury ordered J&J to pay $4.69 billion to 22 women who blamed the talc-based product for their ovarian cancer. The prospect of similar judgments increased after Reuters published a story last month alleging that the company had known for years that its talcum powder contained “small amounts of asbestos,” and had kept that knowledge a secret.

For Johnson & Johnson, Lawsuits, Not Earnings, Are The Pain Point

JNJ Weekly TTM

The news abruptly ended an impressive rally in JNJ stock, causing it to plunge from a near record-high of almost $149 in December, wiping out $45 billion in the company’s market value. Currently trading at $131, JNJ shares have barely recovered since the stumble.

Though the July verdict was appealed, the company lost the motion in mid-December. Still, Johnson & Johnson plans to continue seeking a reversal of the motion via additional appeals. Going forward, the question no one can answer at this juncture is how will all this be resolved?

For mega cap consumer companies such as JNJ, reputation is paramount. Without addressing the argument that JNJ says it has strong scientific research backing its case that its talc does not contain asbestos, the problem we see is that the company has a mixed track record in this battle.

Juries in states including Missouri, California and New Jersey have handed down more than $5 billion in total awards to plaintiffs since suits started going to trial in 2016. However, some of those verdicts have been thrown out by judges. J&J has appealed or won verdicts in other cases while still others were declared mistrials. To date Johnson & Johnson has only settled in one case.

Estimates put the possible damage to JNJ as a result of these claims at as high as $20 billion. That’s a colossal amount. Even if that number were to be cut in half, it means the company will lose its income for the next two quarters, assuming it continues to produce around $4 billion in net quarterly profit.

Bottom Line

We believe Johnson & Johnson will continue to fight these claims. Given the large number of cases involved, the company will find it hard to settle. If the situation persists well into 2019, it will continue to be a major weight on J&J’s share price.

In our view, now is not the time to call a bottom on JNJ shares despite the company’s excellent moat. Even its attractive 2.79% dividend yield and stellar history of raising its payout for 55 years in a row isn’t enough to make the stock a buy right now. For investors, the prudent strategy is to stay on the sidelines and monitor how the situation evolves, at least into the summer.


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