Johnson & Johnson (JNJ) got regulatory approval to buy device maker Synthes for $19.7 billion late on Tuesday and J&J shares have been on the rise today. They’re up about 2% this afternoon.
Not only does the deal remove a significant unknown from the stock, the Street appears happy with the way Johnson & Johnson is financing the deal.
J&J will finance the deal in a creative way: Irish subsidiary Jannsen Pharmaceutical plans to generate cash for the deal using an accelerated share repurchase plan. “[T]he deal is effectively being financed with cash on hand, which is more favorable for J&J,” wrote Raymond James analyst Jayson Bedford in upgrading shares to Outperform.
“JNJ has underperformed in 2012, but we believe the stock has both offensive (accelerating growth profile, rich pipeline) and defensive (about 4% dividend yield, discount to the S&P on a P/E basis) characteristics that should appeal to a broad range of investors,” Bedford added.
Others also think that investors should take another look at J&J in light of the deal.
“I think its a good deal to begin with and the creative financing makes it even better and accretive to earnings,” said Jeff Jonas, an analyst at Gamco Investors, which owns shares in the company. Jonas says it’s a good time to be buying the stock. Gamco is “adding to that position.”
Jonas called the Synthes business, which focuses on spinal devices, “recession-proof.”
To JP Morgan analyst Michael Weinstein, the Synthes acquisition is just one reason to buy the stock. In fact, he can think of at least seven:
“(1) A defensive mega-cap stock in a difficult market, and one that�s been a big market laggard the last 12, 24, 36 months; (2) One that�s now trading at a 5% discount to the sum-of-its-parts (historically a buy signal) and down from a 27% premium 31⁄2 years ago; (3) It has a 3.9% dividend yield (highest level in 28 years); (4) Fundamentals are improving: we�re calling for an acceleration in organic revenue growth from 0.9% in 1Q12 to 5%+ in the 2H of the year (the first time J&J has been anywhere close to 5.0% since 2007); (5) There�s a new management story; (6) On Tuesday night, management figured out a way to put its OUS cash to work, announcing an accelerated share repurchase for 6.8% of the outstanding stock; and (7) J&J has call options on a handful of promising pipeline assets, none of which are reflected today in the stock. Our year-end price target is $74 a share, valuing J&J at 13.5x our upwardly revised 2013 estimates and a modest premium to the sum-of-its-parts.”
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