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Reuters has recently published a story indicating that Johnson & Johnson (JNJ) has known internally about the presence of asbestos in its talcum powder for decades.

This is not a new revelation as a review of JNJ's 10-K reports from several prior years discloses the talc issue under 'Legal Proceedings'.

There are currently ~9,000 - 10,000 pending talc related cases.

In July 2018, a Missouri jury ordered JNJ to pay a record $4.69B to 22 women who alleged the company’s talc-based products, including its baby powder, contain asbestos and caused them to develop ovarian cancer; JNJ is appealing the decision.

This article analyzes whether the JNJ shares are now fairly valued after the recent ~15% pullback.

 

Summary

  • Reuters has recently published a story that JNJ has known internally about the presence of asbestos in its talcum powder for decades.
  • Regardless of whether investors feel this is ‘old news’ or not, the fact remains that there are roughly 9,000 – 10,000 pending talc related cases.
  • JNJ is currently appealing a case in which a Missouri jury, in July 2018, ordered JNJ to pay a record $4.69B to 22 women who alleged the company’s talc-based products.
  • In addition to JNJ specific headwinds we have various macro conditions which suggest further pressure on JNJ’s stock price is highly probable.

Introduction

The last time I wrote a Johnson & Johnson (NYSE: JNJ) related article was September 15, 2017. In that article I stated in ‘Final Thoughts’ that ‘JNJ is one of the companies investors should hold in their portfolio for the long-term if they are seeking safety, capital appreciation, and steadily increasing dividends.’

At the time of that article, JNJ was trading at ~$134. One look at JNJ’s stock chart and we see that JNJ shareholders have certainly been on a roller coaster ride.

On November 26th, JNJ’s stock price reached a high of $146.90. Subsequent to that date, JNJ’s share price started to pull back.

On December 14th when Reuters published its story that JNJ knew for decades that cancer-causing asbestos lurked in its Baby Powder, JNJ’s share price tumbled to the current $133; the decline in JNJ’s share price erased ~ US $47B from its market capitalization. Click here for Reuters' Lisa Girion’s interview with CNBC in which she discusses her JNJ story.

In response to this Reuters story, JNJ released a statement regarding the speculation about the safety of its products. JNJ has also devoted a section of its website in which it discusses the safety of talc powder.

Given the recent significant pullback in JNJ’s share price, I strongly suspect many investors are wondering whether this is an opportune time to acquire shares in one of only two AAA rated companies. S& P Global initiated a AAA rating in September 1987 and Moody’s initiated it in November 1994; both ratings have remained unchanged since then.

I have been a long-time JNJ shareholder, and therefore, I am taking a keen interest in any new developments regarding the talc legal issue even though it has been known for years that JNJ’s baby powder product contained talc.

Lawsuits Are Nothing New to JNJ

Interestingly, JNJ’s credo begins with:

‘We believe our first responsibility is to the patients, doctors and nurses, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality.’

When we look at JNJ’s 2017 10-K, the information set forth in Note 21 ‘Legal Proceedings’ of the Notes to Consolidated Financial Statements (pages 81 – 93 of a 117 page document) strongly suggests that adhering to the statement reflected above is extremely costly...as in ~$1.3B/year (see 'Why JNJ is a Litigation Magnet' article)!

A review of several previous 10-Ks reveals that extensive legal proceedings are a normal course of JNJ’s business. JNJ truly has extensive experience when it comes to defending itself!

In cases where the court finds in favor of the plaintiff, JNJ appeals the rulings. It would not surprise me if over several decades a substantial number of plaintiffs have ultimately agreed to a much smaller settlement than that awarded to them just so they could finally put the matter to rest and at least walk away with some settlement.

4 Stages of a Crisis

Before delving into whether JNJ is fairly valued after the recent ~15% pullback I thought I would look at where JNJ’s current talc crisis falls in terms of the four major stages of a crisis; these stages are very similar to the four major stages of a disease.

Prodromal Stage

Following the incubation period (the initial stage of an infectious disease), we have the Prodromal stage where the symptoms may not be very specific or severe. JNJ, in this case, can still perform usual functions although distress or discomfort may be felt.

Acute Stage

This is when a crisis becomes visible outside the organization. Once a company enters this stage management has little choice but to address the crisis. At this stage, it is too late to take preventative actions. Any action taken now is more appropriately associated with damage control.

Chronic Stage

This is typically the longest of the 4 stages and is when litigation occurs, media exposes are aired, internal investigations are launched, government oversight investigations commence and so on. This stage can last for years and in some cases this stage may never end.

Resolution Stage

This is the final stage of crisis management. Things begin to return to normal and effective resolutions to address the issue(s) are put into practice. Depending on how these resolutions are implemented and followed, it is possible that the crisis may fade from the spotlight.

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Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to charles@financialfreedomisajourney.com.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long JNJ.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.