Johnson & Johnson Prescribes Healthy Returns Without M&A or Breakup

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NEW YORK ( TheStreet) – Bigger is not always better and breaking up is hard to do . Even worse, pursuing a market just because it's the trendy thing to do can become a recipe for disaster.

Johnson & Johnson investors love playing " armchair CEO ." On the heels of Medtronic's $42.9 billion deal for Covidien , Johnson & Johnson is perceived not big enough. And this comes after years of pleas to break up Johnson & Johnson into smaller pieces.

The stock closed Friday at $105.10, up more than 16% on the year to date. Johnson & Johnson shares are outperforming the health care sector's 12% gain. As it stands, very few drug/med-tech companies have performed as well, especially given Johnson & Johnson's size ($300 billion market cap).

These same investors who think they know the company better than its management does  have made a lot of money, proving that investors only need to invest and let company leaders lead. That's the way it works. As evidenced by the company's strong profit growth (up 35% in April) and the stock's YTD performance, management knows what it's doing. But that hasn't stopped the nervousness.


[Read: 14 Insanely Important Biotech/Drug Trading Catalysts ]

With Johnson & Johnson's P/E now over 20, doubling that of Pfizer , the concern is that the stock has gotten expensive. While shares are not as cheap as they were toward the end of the March quarter, things are only going to get better, given management's focus on shareholder returns.

The way I see it, Johnson & Johnson's fundamentals support a sustained uptrend toward $120 in the next 12 to 18 months, representing 14% upside. This is assuming management can maintain a long-term revenue and free cash flow growth rate of 5%. And with meaningful improvements made each quarter in areas like orthopedics and medical devices, selling the stock here would be a mistake.

What's more, Johnson & Johnson's unexpected spike progress in its immunology platform makes it a worthwhile threat in territories currently dominated by Merck and Sanofi . Combine these areas with the company's advances in cancer/oncology (up more than 30%) very few drug/med-tech company's can compete with Johnson & Johnson in the next two years. And I haven't even mentioned Johnson & Johnson's dominant drug business .

This is what Medtronic understood by picking off Covidien. It's also why in April Zimmer Holdings picked off orthopedic device maker Biomet for $13 billion. Companies are feeling the pressure of price curbs that have been imposed by the Affordable Care Act. They have no choice but to adapt, and in some cases, merge. Johnson & Johnson doesn't need to.


[Read: Medtronic’s Play for Covidien Is No Solution for Silicon Valley ]

Johnson & Johnson's management understands that amid all of the noise about M&A, organic growth and the so-called diminishing productive balance, Johnson & Johnson can/will deliver where it matters the most -- on the bottom line.