With Johnson & Johnson (JNJ) bouncing off record highs, BTIG has thrown in the towel on its buy rating. Analyst Dane Leone has downgraded the stock today to neutral from buy.J&J fell 0.63% to a recent $113.52.
Downgrading ahead of the Investor Day next week is a risk, but at this point we are not expecting any major strategic shifts. We remain interested in the long-term JNJ story, but also must acknowledge current levels of the stock price with regard to our thesis.
Why? Leone is less confident in the outlook for merger and acquisition activity in the medical device sector.” That had been a main driver of the firms prior “buy” rating. But with prices rising for Edward Lifesciences (EW) and other cardiovascular device companies, Leone is less optimistic that J&J will be able to execute on transformational deals.
Medical Device M&A has Been the Primary Miss to Our Thesis: The second pillar to our initial Buy rating was the expectation that JNJ management would execute transactions within the Medical Device industry, namely cardiovascular focused areas, which could help diversify its business away from the slow growing Orthopaedics market and also increase International exposure to more growth oriented geographies. There is still ample opportunity for M&A during the remainder of 2016, with ~$16.5bn of net cash on the balance sheet as of 3/31/2016, but recent price appreciation of cardiovascular growth companies such as Edwards Lifesciences (EW, Buy, $122 PT, Analyst: Sean Lavin), makes us less optimistic that 1) JNJ will be willing to execute on more transformational Medical Device M&A and 2) If executed, larger M&A would be meaningfully accretive. For example, our Accretion analysis of EW only suggests a ~4% EPS benefit within the first 12-months (2017), assuming a +20% transaction premium to the current share price along with ~$200m of first-year cost synergies baked into the transaction.
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