BUY OR SELL-Are J&J shares ready for a run?

* Shares up more than 6 pct since posted results Tuesday

* J&J stock has underperformed S&P in last 2 years

* Company seen resolving plant and patent problems

* But recall stain could continue to hurt brand

* Pfizer seen more apt to break up, unlock value than J&J

By Lewis Krauskopf

NEW YORK, April 20 (Reuters) - Johnson & Johnson (JNJ.N) shares have gotten off the mat and may have more room to rise.

The company -- which is so large and diverse it is often referred to as a healthcare mutual fund -- has seen its shares underperform for a year, due largely to a wave of recalls that have hurt sales and sullied its reputation. Patent expirations to several top-selling medicines also have hurt results.

In the past year, J&J shares are down more than 2 percent even as the S&P 500 rose 11 percent. Since the March 2009 market bottom, J&J stock has underperformed the S&P 500 by about 60 percent.

But shares of J&J, a member of the blue-chip Dow Jones industrials index, rebounded this week after J&J posted higher-than-expected profit on stronger sales of its prescription drugs business. The stock was trading at $64.40 on Wednesday afternoon, up 6.5 percent since J&J reported first-quarter results the day before.

Is now the time to buy J&J shares?

BUY

Leerink Swann analyst Rick Wise said many of the challenges J&J has been facing may be easing.

The company appears to be resolving its manufacturing issues in its consumer products business, while its pharmaceuticals business is set to improve as its patent expirations wind down and newer products for conditions such as hepatitis C and blood clots come to fruition.

An improving economy also would stand to help J&J, as many Americans, looking to save money, have delayed procedures that involve J&J's medical devices.

"As we get to the second half, that should be a top- and bottom-line growth inflection point," said Wise, who rates the stock "outperform." "They've had an immense patent expiration cliff they've been falling down the last several years. We're really at the tail end of that."

J&J's efforts to cut costs should drive increasingly positive operating leverage as sales rebound, Wise said.

The company also has "the most extraordinary, outstanding financial strength imaginable," said Wise, citing its AAA debt rating, exceptional free cash flow generation, and low debt-to-capitalization levels.

"That gives them immense flexibility in terms of considering their options," Wise said, such as looking for acquisitions or increasing its dividend or share buybacks.

As of Tuesday's close, J&J shares traded at about 12 times Wise's 2012 earnings estimates, but Wise values the stock at $73 per share when applying a multiple of 14 to the stock.

"You'll see the multiple be stronger ... because it's J&J and they're back and now you don't have to worry," Wise said. "A premier franchise when things get resolved can get a better multiple than you might rationally expect or guess today."

STAY AWAY

Chris Konstantinos, healthcare strategist and portfolio manager with Riverfront Investment Group, said he is concerned the manufacturing problems that led to the recalls of Tylenol and other products may leave a lasting stain.

J&J has recalled more than 300 million packages of over-the-counter medicines in the past 16 months after regulators cited faulty procedures and other quality-control lapses at its factories. It is fixing the problems under supervision of the U.S. government

"I'm certain that their manufacturing processes will get worlds better," said Konstantinos, whose firm has about $3 billion under management. "The issue longer term is that some of the damage that has been done to the brand is going to take longer to repair itself not only among consumers but also among institutional investors."

"The stock really hasn't been able to capitalize on some of the good things they've had going on on the drugs side of the house because they've had huge issues on the manufacturing side," Konstantinos said.

J&J, Konstantinos said, probably suffers from a "conglomerate discount."

"It might make sense, if you could break that company apart and have each of the disparate pieces trade separately, that investors may have a chance to get some of that conglomerate discount back," he said.

Konstantinos said he is "cautiously constructive" on pharmaceutical companies overall, but "vastly" prefers Pfizer Inc (PFE.N) to J&J in large part because Pfizer's new chief executive appears open to breaking up his company.

"We think that J&J can probably benefit from some similar kind of thinking," Konstantinos said. "And until we see that sort of shake-up at the management level I think we remain cautious on the stock relative to the opportunities that a company like Pfizer has." (Reporting by Lewis Krauskopf; Editing by Gary Hill)