Johnson & Johnson wants to separate consumer segment into a separate company. And Zillow shows everyone, how not to digitalize the real estate sector.
Disclaimer: when we talk about, that something has grown, we mean a comparison with the same quarter a year earlier. Since all issuers are from the USA, then all results in dollars. When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
"You can, you can!»: what the collapse of Zillow real estate speculation says
About a month ago, the American site for the sale and purchase of residential real estate Zillow Group (NASDAQ: ZG) announced the termination of buying houses before the end of the year due to extreme congestion and high prices on the market. Much later, dark details surfaced..
As it turned out, Zillow algorithm bought houses without regard to the market situation. Happened, that about 2/3 houses, which Zillow bought and put up for sale, were cheaper, What did the company pay for them in the first place?, - on average for 4,5% cheaper. The company had to write off approximately $569 million of losses on unsuccessful speculations.. Zillow also announced plans to lay off 25% their employees.
There are several problems with the Zillow situation., and all of them are closely related to each other. Initially, the service for reselling houses by algorithms was built on low-margin work: houses the company usually bought at a price of only 1,4% below the market. Zillow attracted homeowners by quickly selling a house without problems for a small discount. In itself, this is not bad - this is how the business of resellers-speculators in the real estate market works.. The miscalculation was related to the mathematical model of the Zillow software.
The algorithm, based on the huge amount of data it had, gave too optimistic forecasts for house prices and did not take into account at all, that someday consumers will stop buying homes at exorbitant prices. And at the same time, the algorithm continued to learn and reasoned, that it is necessary to "forge", while it's hot.", and bought houses at a very low price, from his point of view, price. The company expected, that no more 50% homeowners will accept Zillow Algorithm Offers, and they turned out to be much more - 74% all homeowners, received algorithm suggestions. All in all, the algorithm made homeowners too generous offers, which ended with the accumulation of the volume of houses, which the company could not sell even at cost.
In parallel, problems in logistics and supply played a negative role, from which all enterprises in America and the world are now suffering. Buying houses, Zillow spent some time refurbishing them before reselling them.. But logistical gaps didn't allow it to be done quickly enough., despite the fact that the algorithm bought houses more actively, – as a result, the stock of unsold houses continued to grow. And enough houses have accumulated by the time the real estate market cools.
It cannot be said, that Zillow's failure threatens to bury "algorithmic real estate speculation". From Opendoor Technologies and Offerpad Solutions, offering similar solutions, everything was great: their algorithms quickly changed their strategy. By the way,, this is also noticeable in the reporting of the mentioned Zillow competitors: gross margins of both companies were significantly higher, than Zillow, for almost two years. Actually, they even plan to expand their operations..
Main, what can we learn from this situation, - understanding, that the digitalization of the construction and real estate business is almost inevitable. Even manufacturers of building materials such as Builders FirstSource are already investing in their IT services - our reader Egor Mokeev gave a tip in the comments to the Procore review.
Opendoor and Offerpad example shows, that the problem for companies is not algorithms per se, namely them, that were designed and configured with errors, like Zillow. So what can you expect, that real estate market players will increase their investment in IT.
Bulk sale of a large number of Zillow homes at a discount can be considered a big plus for those REITs, who are engaged in the rental of residential buildings: now they can buy houses from Zillow for cheap. Also, maybe, this will allow prices to drop somewhat on the US real estate market, because Zillow was a major channel for the rapid sale of homes for many American consumers.
Johnson and another Johnson: Johnson & Johnson plans to split into two companies
Johnson Conglomerate & Johnson plans to split into two companies: the main JNJ will keep the pharmaceutical business, and the new company will have a business selling consumer goods.
The company's management declares, that the decision to separate the consumer part of the business into a separate company is due to the fact, that consumer JNJ should have its own marketing strategy.
But in general, all this is happening against the backdrop of the company spinning off divisions with a bunch of legal problems and multibillion-dollar consumer lawsuits into a separate company with the aim of bankrupting it.. By the way, the consumer part of the JNJ business was just selling asbestos powder - I think, that the decision to separate the consumer part of JNJ into a separate company was dictated primarily by the risks of new ruinous lawsuits in the asbestos case. Otherwise, JNJ would split into three parts, spinning off medical devices into a separate company.
Let's try to imagine, what individual companies will look like, based on the annual report of the still unified JNJ.
"Medical" JNJ – medicines and medical devices. Revenue — 78.6 billion dollars: 45,6 bn — pharmaceutics with pre-tax profit margin of the segment 33,9% from its proceeds; 23,6 billion — medical devices with pre-tax profit margin of the segment 13,3% from its proceeds.
This company's pre-tax profit margin would be 23,54% from its revenue. Revenue by country and region in the company would be distributed as follows: USA - 59,6%, other countries - 40,4%.
"Consumer" JNJ - personal care products. Revenue - 14.053 billion and pre-tax profit margin - minus 7,6 from revenue in 2020, because the payments in the asbestos case ate all the profits and led to losses. To be fair, it can be noted, that without legal fees, the pre-tax profit margin of JNJ's consumer business in 2019 was 14,8% from its revenue.
By type of goods, the company's revenue would be divided into the following types of goods:
- Non-prescription medicines - 34,32%.
- Beauty and personal care products - 31,66%.
- Oral care - 11,67%.
- Goods for child care - 10,79%.
- Women Health - 6,41%.
- Wound treatment - 5,15%.
Revenue by country and region in the company would be distributed as follows: USA - 45,27%, other countries - 54,73%.
If the partition succeeds, then a separate consumer JNJ will receive a capitalization of about $45 billion. Separation of companies should occur within 18-24 months.
The large conglomerates section has its fans: supposed, that individual companies can grow faster. But in the case of JNJ, there are quite a few circumstances, which must be taken into account.
Firstly, as recent experience of other medical issuers shows, spinning off their divisions into separate companies does not cause an increase in investor interest in these new companies - and the quotes of new companies are slipping. But, as Leslie Poles Hartley wrote in The Broker: "The past is another country. They do things differently there.". So for a separate “consumer” JNJ, things may turn out differently..
Secondly, Asbestos-free JNJ's consumer business is generally stable and allows the unified JNJ to plan its finances ahead. JNJ medical device business hit hard by coronavirus crisis, and its pharmaceutical business is permanently under attack due to the expiration of drug patents. Consumer business, maybe, and did not show strong growth, but in general showed a stable result for many years.
Thirdly, you should not forget about asbestos problems of JNJ consumer business: the risks of huge new spending grow along with the number of new lawsuits.
So a simple answer to the question “Should shareholders be happy about the division of JNJ into two companies?» no. Time will show.
