Morgan Stanley Sees Breakup Case For J&J As 'Unlikely To Resonate With Most Investors'

Morgan Stanley’s David R. Lewis has maintained an Equal-weight rating on Johnson & Johnson JNJ, with a price target of $108.

According to the Deutsche Bank report, “Calls for activism have raised the question of whether J&J should break up. The business could possibly be run better separately, but we think the case for breakup is unlikely to resonate with most investors.”

Analyst David Lewis mentioned, however, that improved execution, along with capital deployment and better incentives could create value.

Although the rationale for a breakup is still unclear, Lewis stated that a breakup could succeed with the right “blend of ingredients,” such as definitive strategy for better execution, history of underperformance and valuation arbitrage between the “sum and its parts.”

“Based on this rationale, we do not see an overwhelming case for a breakup of J&J,” Lewis said.

Although the stock has underperformed the overall Healthcare segment over the past 10 its, it has outperformed the S&P 500. The analyst believes that Johnson & Johnson’s performance relative to Healthcare cycle, as well as sub-segments of the sector, are defensible.

In addition, Lewis stated that there have been signs that management was becoming more responsive to investor concerns, such as increasingly active portfolio management, meaningful restructuring of MD&D, a share repurchase initiative worth $10 billion and “the dynamics around J&J’s 2016 guidance which provided operating margin expansion material above its 10-year trend.”

At the same time, the analyst recommended further improvement, especially in the areas of earnings quality transparency and executive compensation.