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Can Johnson and Johnson Survive this Latest Controversy?

Josh Enomoto

Over the past year, pharmaceutical and consumer staples giant Johnson & Johnson (NYSE:JNJ) has suffered from a split personality. On one hand, Johnson and Johnson offers multi-varied exposure to the markets. While it has a robust pharmaceutical business, it also generates significant revenue from everyday household products. But on the flipside, those products have been the source of outrageous controversy.

Investors Should Short JNJ Stock and Buy Boeing Stock

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One of the ugliest examples of corporate malfeasance in memory, Johnson and Johnson allegedly knew for decades that its talcum powder contained asbestos. Earlier this year, a California-based jury ordered the company to pay more than $29 million in damages to a woman who claimed that the asbestos in JNJ-branded powder caused her cancer. Following the announcement, JNJ stock dipped noticeably.

However, that verdict passed in March, giving shares some time to recover from the controversy. Still, that wasn’t the only problem management had. Making headlines in recent years is the ongoing opioid crisis. Very briefly, pharmaceutical companies prescribed painkillers to patients decades ago, only to discover recently that these painkillers are highly addictive. While not the biggest culprit, Johnson and Johnson unfortunately became embroiled in this broader scandal.

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Still, that didn’t stop the company from pulling off a surprising earnings beat for its third quarter. Both on per-share profitability and revenue, Johnson and Johnson beat analysts’ consensus estimates. Essentially, the Q3 report demonstrated the power of having multiple revenue streams.

Further, management reached an agreement in principle with four state attorneys general to settle all opioid claims for $4 billion. Finally, JNJ stock can clear its slate, or so it seemed. Another negative headline brings the company back full circle.

Will Fresh Asbestos Case Hurt JNJ Stock?

Just when management was attempting to put the legal controversies behind them, they got hit with another incident. Around mid-October, the company disclosed that it was recalling 33,000 bottles of baby powder. This occurred after U.S. regulators found trace amounts of asbestos in a sample of products.

The only real positive — if you can even call it that – is that this impacts 22-ounce bottles. Still, retailers are taking no chances. Before the last weekend of October, major retailers including Walmart (NYSE:WMT) and Target (NYSE:TGT) are removing the impacted products from their shelves.

Also, CVS Health (NYSE:CVS) is taking extra precautions, removing the 22-ounce baby powder from its “digital” shelves. That might inspire Amazon (NASDAQ:AMZN) and other e-commerce companies to do the same. Simply put, there’s no point in sharing liability with Johnson and Johnson.

For right now, JNJ stock remains relatively muted. That said, investors are questioning how to balance the company’s potential with its ugly and recurring controversies.

If recent history is a guide, you can still make a speculative case for JNJ stock. Though the asbestos issue is extremely worrisome, Americans have a tendency to forget controversies, health-related or otherwise.

For instance, just a month ago, no one could stop talking about the vaping crisis. Almost every other day, the media would report a salacious story of a young person succumbing to a lung illness. Demands to address the epidemic went straight to the White House.

Now? Salacious stories still exist, but they have lost their fervor and resonance. Even the Centers for Disease Control and Prevention note that incidences may be leveling off.

In other words, Americans have refocused their energy on what really matters: whether or not President Donald J. Trump is a really bad person who deserves impeachment.

Johnson and Johnson Has a Blueprint for Recovery

The counterpoint to my argument is that corporate scandals tend to have a long shelf life. But even if the public decide to hold Johnson and Johnson accountable, management still has a blueprint for a recovery.

In my last article about the pharmaceutical giant, I referenced the case of drug-maker Merck (NYSE:MRK). Its “arthritis drug Vioxx caused multiple heart attacks. That wasn’t all: those heart attacks led to 38,000 deaths.”

My point was that Merck killed 38,000 people. In terms of culprits, no ambiguity existed. Yet Merck has recovered well from that awful incident.

With social media and movements such as corporate shaming, Johnson and Johnson admittedly has a tough road ahead. But it’s not impossible for the company to recover. Based on its long and storied history, I think a recovery is probable. Thus, it may not make sense to give up on JNJ stock.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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