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Dow-30 Earnings: Johnson & Johnson - Third Quarter 2012
Johnson & Johnson (JNJ - Free J&J Stock Report), a company engaged in the research & development, manufacture, and sale of a broad range of healthcare and consumer products, recently reported third-quarter results.
Revenues came in at $17.1 billion, up 6.5% from a year earlier. The figure trumped the consensus target of $16.9 billion, but fell short of our more aggressive estimate of $17.3 billion. Management said that operations added 10.8% to the top line, but the negative impact of currency translation was 4.3%. More specifically, domestic sales increased a stout 13.4%; international revenues rose just 1.4%, reflecting operational growth of 8.9% and foreign exchange headwinds of 7.5%. (Results included the impact of the recently completed acquisition of Synthes, net of the divestiture of the DePuy trauma business, which contributed 5.8% to worldwide top-line growth.)
GAAP profits and share earnings in the September period were $3.0 billion and $1.05, respectively. Net income did, however, include $553 million in after-tax nonrecurring items, mostly related to in-process R&D charges and integration costs associated with the Synthes transaction. Consequently, adjusted profits were $3.5 billion, and adjusted share earnings were $1.25. This is a penny ahead of the year-earlier figure, and $0.04 better than both our target and the consensus estimate.
As has been the case for a while now, the Consumer business remains a thorn in J&J's side. Sales here dropped 4.3%, to $3.6 billion, which fell slightly short of our estimate. Even after backing out unfavorable currency exchange translations of 5.3%, revenues increased a mere 1.0%. Management singled out over-the-counter upper respiratory products, LISTERINE oral care offerings, and NEUTROGENA skin care goods as being positive contributors. We should also note that sales seem to have flattened out, quarter to quarter, and that year-over-year growth is improving, albeit marginally. Thus, we think this group could well become a major contributor to growth in the not-too-distant future.
Elsewhere, Pharmaceutical sales rose 7.0%, to $6.4 billion, which easily topped our expectations. Underlying top-line growth was 11.3%, and foreign exchange headwinds subtracted 4.3%. Growth was especially good in the U.S., and demand for new offerings seemed to be relatively strong across the board. Moreover, the company advanced its strong pipeline with regulatory approvals for a number of new products, and submitted several new drug applications.
Finally, Medical Device & Diagnostic revenues were $7.1 billion, representing an increase of 12.5% from a year earlier. J&J notched double-digit growth both at home and abroad (before currency translation), thanks largely to the addition of Synthes. Cardiovascular care, specialty surgery, and disposable contact lenses were also pockets of strength. That said, we were looking for even stronger revenue growth of about 18%.
We have made some adjustments to our estimates. We trimmed $400 million from our full-year sales call, which now stands at $67.3 billion. Moreover, despite the company topping our third-quarter share-earnings estimate by $0.04, we have only added two pennies to our 2012 target, which now stands at $5.09. This is near the high end of management's guidance.
Investors reacted positively to the earnings news, driving up the price of JNJ shares by a decent amount in the hours following the release. The stock continues to trade just shy of its 52-week high of $69.75, as it has since early July. The latest test of the $70-a-share mark is proving to be one of the most formidable in recent memory. Given our somewhat pessimistic outlook for the fourth quarter, we expect the stock to gradually slide back to the $64-$66 range by the end of the year. Consequently, seasoned investors may want to look to option strategies to take advantage of this stock's somewhat predictable nature. However, if management's 2013 earnings guidance is anywhere near the $5.45 a share we are looking for, investors should expect another test of the $70 ceiling. Moreover, we think that a new range (with an improved price/earnings multiple) may well be formed in the not-too-distant future.
The song remains the same as far as our longer-term recommendation is concerned. Indeed, we like JNJ as a 3- to 5-year holding for just about every type of portfolio out there, since the company's earnings growth prospects are relatively strong and seemingly well defined. The above-average dividend yield, low volatility, and 1 (Highest) Safety rank are also big bonuses.
About The Company:Johnson & Johnson manufactures and sells health care products. Its major lines consist of numerous household products. The company operates in a diverse number of segments, including Consumer (baby care, nonprescription drugs, sanitary protection, and skin care), Medical Device & Diagnostics (wound closures, minimally invasive surgical instruments, diagnostics, orthopedics, and contact lenses), and Pharmaceutical (contraceptives, psychiatric, anti-infective, and dermatological drugs).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.