Although the company's new product launches, cost-cutting efforts and recent appointment of new CEO make us optimistic, its market share losses, lowered credit ratings, waning SUV sales and a tougher operating environment concern us.

J&J Trading Near Fair Value

Johnson & Johnson's (JNJ) revenue growth in the next few years will likely be slower relative to 2007, as declining sales is expected for a number of products. Incremental earnings growth will come in the form of improving margins and share buybacks and we expect earnings to outpace revenue growth beyond 2008. Investment in J&J offers consistency, reliability and perhaps safety in this volatile market. We consider the name a core holding.

While we expect the Consumer division to continue to perform particularly well, generic competition will keep a lid on growth of the company's Pharmaceutical division over the next few years. Looming patent expirations of antipsychotic Risperdal (June 2008) and epilepsy drug Topamax (March 2009) will extend the softening of the division's revenue growth. While the company has a number of late-stage candidates that are expected to be monetized in the near-term, they will not begin to make a material impact until 2010 or 2011.

Johnson & Johnson currently trades at 14.8x our 2008 EPS estimate of $4.45, slightly richer than the large-cap pharmaceutical industry average of 13.6x. Historically, J&J has sold at a premium to the S&P 500 and pharmaceuticals. As such, we believe the current price makes J&J stock worth considering as a long-term investment and a core large-cap pharmaceutical holding. We believe the stock is correctly priced, and should post in-line returns over the next six-to-nine months.

Our $70 price target implies a P/E multiple of 15.7x our 2008 EPS estimate of $4.45. Although at the current price we believe the shares are fairly valued, we view a price around $60 as an attractive point to begin accumulating the stock.

Jason Napodano, CFA, contributed to this report.

Risks & Costs Factor for Syneron

Despite inline revenues, weaker gross margins and higher operating expenses led to Syneron Medical, Ltd's (ELOS) EPS to be below our expectations in the first quarter. We continue projecting results below the management's guidance. Hence, our 2008 revenue growth outlook remains at 6%, below the management's guidance, from our prior 10% growth expectation. Visibility, in our opinion, is poor. Our target remains at $17.00.

The market for aesthetic procedures is experiencing substantial growth with increasing interest in beauty treatments. Within this market, the non-surgical segment is growing the fastest. In February 2008, ELOS unveiled two new products, Matrix RF and a laser-assisted lipolysis product. Currently awaiting FDA approval, both products are expected to be launched in 2H08.

Syneron has also established itself as the developer of the leading cellulite treatment product. On June 10, Syneron Medical announced a multi-year exclusive provider agreement with Sono Bello Contouring Centers for its LipoLite laser-assisted lipolysis device, and VelaShape cellulite and thigh circumferential reduction device. The company estimates that the market for body shaping devices will grow 30% on a compounded basis to $740 million in 2011.

For the first quarter, ELOS reported top line results in line with our estimates. However, GAAP earnings per share were below our estimates by two cents on weaker product margins and higher operating expenses. Despite competitive differentiation in cellulite treatments, we believe the company's growth will be slower than prior years given the weak outlook for the U.S. economy.

Despite the benefit of paying little or no income tax, operating in Israel poses political and military risk of disruptions. And, recent management turnover is worrisome, supporting our belief that the company should trade at a discount to peers, as it has done historically. On par with the industry average of 0.9x 2008 PEG, our target remains at $17.00 or roughly 13.5x our $1.25 2008 EPS. Assuming a 35% tax rate, our 2008 EPS estimate would be $0.89, and the equivalent target P/E would be 19x 2008.

Rajarshi Maulik contributed to the report.