J&J's 'Steady Cash Flow Is Key'; Barclays Upgrades To Overweight

• The share price of Johnson & Johnson JNJ has appreciated 7.73 percent over the past three months, from $92.08 on September 1.
• Barclays’ Geoff Meacham has initiated coverage of the company with an Overweight rating and price target of $115.
• Meacham believes that it would be more beneficial for the company to focus on capital deployment for sustainable growth assets in 2016, rather than considering a break-up of the company for financial reasons.

Analyst Geoff Meacham elaborated, “JNJ has underperformed the S&P 500 and DRG over the past 12 months due to concerns about the impact of biosimilars on Remicade, low near-term earnings growth, and a lack of significant near-term pipeline catalysts.”

While this has led to calls for the conglomerate to be broken up, Meacham believes that such calls are premature, especially given that splits/spins in the pharma segment in recent times have often resulted in higher than anticipated transition and support costs but only mixed success.

According to the Barclays report, “JNJ's balance sheet provides it the flexibility to acquire various growth assets.”

However, a pharma deal would be preferable to a large med tech/ortho acquisition, given that industry consolidation could be a “cost-savings play that is unlikely to boost longer-term growth or to provide significant multiple expansion.”

Although Johnson & Johnson’s next growth wave is likely to come from its autoimmune pipeline, Meacham believes that the company also needs to focus on new therapeutic categories.

“JNJ has historically acquired late stage pipeline/early commercial stage assets and then leveraged the acquired R&D expertise into next generation drugs,” Meacham mentioned.