Johnson & Johnson: Nothing to Fix Here

JNJ“If it ain’t broke, don’t fix it,” goes the old saying. If there is no evidence of a real problem, then why bother with it?

For quite some time now, one of the major arguments against Johnson & Johnson (NYSE: $JNJ) has been the company is too dependent on its drugs. Although Johnson & Johnson has several businesses in such areas as oncology, medical devices and nutrition, its pharmaceuticals segment has done all of the heavy lifting. The complaint has been the company is not diversified enough.

Management has listened, but they’ve done very little to appease the critics. Management understands that even amid all of the noise about Johnson & Johnson’s organic growth and the so-called “diminishing productive balance,” Johnson & Johnson continues to deliver where it matters the most — on the bottom line. These arguments aren’t new. Nor are they likely to stop.

[Read: Pfizer Needs a Healthy Dose of Investor Love]

But with shares soaring 44% over the past two years, Johnson & Johnson remains — without a doubt — a top-notch player in Big Pharma. With meaningful improvements being made each quarter in areas like orthopedics and medical devices, I agree with management’s position to not try to fix what isn’t broken. And if the company’s fourth-quarter results serve as indication, myths about Johnson & Johnson being “too big to succeed” will remain myths for the foreseeable future.

Revenue advanced 5% year over year to more than over $18 billion, which was strong enough to beat Street estimates by almost 2%. With recent concerns surrounding organic growth, management was able to put much of that noise to rest by posting an organic growth rate of 6%.

As have been the case over the past several quarters, this dominant performance was due to a heavy dose of drugs, which soared 12% year over year on a reported basis. Although the devices segment continue to post sedated results (down 1%), this was significantly offset by a 22% jump in the company’s immunology platform. There’s some evidence that the company has begun to encroach on territories currently dominated by Merck (NYSE: $MRK) and Sanofi (NYSE: $SNY).

[Read: AstraZeneca's Prespriction for Growth]

In that regard, management hasn’t received the credit it deserves for such a quick turnaround in a segment that continues to be treated as an afterthought. When in actuality, there are rivals like Stryker (NYSE: $SYK) and Covidien (NYSE: $COV) who would love to have a so-called “lumbering” 22% source of growth. It doesn’t happen.

What’s more, even in areas that were known to be problematic such as the consumer segments, Johnson & Johnson still managed to produce better than 5% adjusted revenue growth. When you factor in the overriding 36% year-over-year jump in the oncology segment, Johnson & Johnson’s total results standout as the best (in my opinion) of all the large medtech companies that have reported thus far.

I’m saying this with the full understanding that the company posted flat margins and missed the Street’s estimates by roughly 1%. It was noticeable that management opted to put more resources towards sales and general/administrative expenses. This led to a miss in operating income. But that’s no reason to get carried away.

Management had made it known that earnings were going to be under pressure due to the competitive landscape. So if Johnson & Johnson spent to generate more growth, I’m willing to excuse that. Besides, the company is only one quarter removed from posting non-GAAP earnings that climbed more than 11% year over year. So this quarter-to-quarter obsession with the numbers seems a waste of time.

[Read: AbbVie Deserves More Respect]

It’s true the devices business continues an unimpressive pattern. But I’m also willing to credit management for advancing Johnson & Johnson’s other segments. So while this is far from a flawless company, Johnson & Johnson investors should be pleased with the year-over-year and sequential growth, especially in areas cardiology and surgery.

All told, at around $93 per share, as of Friday’s close, I like Johnson & Johnson stock. Admittedly, I don’t like it as much as when shares traded in the $60s, but the fundamentals support a sustained uptrend towards $100. This is assuming management can maintain a long-term free cash flow growth rate of above 5%, which makes this far from a broken company.

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