Shares of Johnson & Johnson fell Monday after a J.P. Morgan analyst downgraded the health care giant's stock, saying it now trades at an 8 percent premium to the value of its parts and he expects the company to reduce its profit forecast.
Analyst Michael Weinstein wrote to investors that he downgraded Johnson & Johnson from "Overweight," — or "Buy" — to "Hold" now because its shares have enjoyed a 30 percent run-up since last June, boosting the company's market capitalization by $54 billion. That puts their valuation at a 16 percent premium to rival large pharmaceutical companies and a 12 percent premium to other big medical device makers.
Still, he increased his year-end price target for the shares from $77 to $83. The stock price has risen from just under $62 a share last June 1 — shortly after new CEO Alex Gorsky took over — to an all-time high of $82.95 earlier this month.
On Monday, shares declined 2.1 percent initially, then recovered somewhat. They were down 1.3 percent, or $1.07, at $80.97 in afternoon trading.
"While fundamentals have improved at J&J, at $82 we think this is much more reflected in the name," Weinstein wrote, adding, "J&J's facing a messy first quarter and a likely downward revision to 2013 guidance."
He wrote that J&J's first-quarter tax rate should be lower than expected because the federal government extended the research and development tax credit, but that revenue will be hurt by unfavorable exchange rates and by a couple of fewer selling days than in the year-ago quarter.
That should result in J&J missing analysts' expectations for first-quarter revenue and lowering its profit forecast for the year by 5 cents to 10 cents per share, to a range of $5.25 to $5.40 a share, mainly due to the exchange rates, Weinstein wrote. J&J has already said it will take a charge of 4 cents per share due to Venezuela's devaluation of its currency.
Weinstein expects J&J to top analysts' first-quarter consensus of $1.38 per share by 3 cents, "because of the tax rate, cost controls and likely some one-time gains."
Johnson & Johnson years ago derived roughly one-third of its revenue each from prescription drugs, devices and diagnostic tests, and consumer health products such as No More Tears baby shampoo. But the drug and device businesses, fueled partly by acquisitions, have been growing rapidly while consumer health sales have shrunk amid dozens of product recalls, delays as factories are upgraded and both problems keeping nonprescription medicines off store shelves.
The company now gets about 90 percent of its profit from prescription drugs and diagnostics, split almost evenly, and only about 10 percent from consumer health products such as pain relievers Tylenol and Motrin.
Follow Linda A. Johnson at http://twitter.com/LindaJ_onPharma