The threat of a big lawsuit can cause a company’s valuation to tank. In an extreme case, like the tobacco companies in the 1990s, it can create an exceptional value, even at the risk of a further potential loss.
Likewise, even companies that have made positive moves towards resolving big litigation can get a reasonable value. That’s because lawsuits take time to play out, as do the settlements for such lawsuits.
Recently,
Johnson & Johnson (JNJ) came under fire for litigation regarding its baby talc products. While some of that litigation is still pending, the company continues to grow its earnings. And they even raised guidance in their latest report.
Shares are down slightly so far this year, amid a big market rally. And JNJ now trades at 15 times earnings, a reasonable value for the basket of pharmaceutical brands owned by the company.
Action to take: Shares are a buy under $170. At their current price near $165, JNJ yields close to 3 percent, and it can likely continue to grow the dividend and compound returns for investors over time.
For traders, the September $170 calls, last going for about $2.90, could see double-digit returns on a further rally higher in shares following JNJ’s earnings beat.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.
