Goldman Upgrades Johnson & Johnson, Removes From Americas Sell List

Goldman Sachs’ Jami Rubin upgraded the rating for Johnson & Johnson JNJ, from Sell to Neutral on improving optionality. The price target has been raised from $102 to $112.

A conglomerate structure has led to Johnson & Johnson having “significant trapped value.” Analyst Jami Rubin mentioned that investors and the media are likely to increasingly focus on “transformative change within the company, including a potential break up strategy, which we have long advocated as the best way to maximize value.”

Consumer Unit: A Potential Spin

Johnson & Johnson is expected to present a Consumer and MD&D review at its May investor day. A potential spin off of the company’s Consumer unit could unlock value. Rubin said that an SOTP analysis now suggests $120, up from the previous $116, and implies that the Consumer unit is worth more than $40bn, or about $17 per share.

The segment is among the top growers relative to HPC comps. The analyst believes there is significant room for margin expansion for the business. He commented, “With recall issues now behind it and the consent decree winding down, yielding improving growth on margin leverage, the Consumer business may be better positioned now than in the past for separation.”

Other Strategies

Rubin mentioned that the spin off presents an opportunity for management to focus on a potential turnaround and “exposes shareholders to the most upside by isolating the consumer rebound.” He added that the separation of MD&D or a leveraged share buyback could be “equally logical.” Other strategies, like growing the company via M&A, would yield “significantly less value for shareholders.”