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Johnson & Johnson (JNJFree Johnson & Johnson Stock Report), a healthcare conglomerate focused on medical devices, pharmaceuticals, and consumer packaged goods, continued the generally positive start to the second-quarter earnings season by reporting favorable June-period results. Sales were $17.9 billion, up 9% from a year earlier, as operational growth of 10% was slightly offset by a 1% drag related to currency translation. This figure was in line with our estimate, but was roughly $175 million ahead of the consensus. J&J also shined on the bottom line, as adjusted share earnings soared 14%, to $1.48 (GAAP share net nearly tripled, to $1.30). Both Value Line and Wall Street analysts, on average, were looking for adjusted share profits of $1.39.

The company did well overseas in the June interim. International sales growth amounted to 9%, reflecting internal sales gains of 12% and a negative foreign exchange impact of 3%. Domestic revenues increased 8%, which was also slightly better than anticipated. Finally, the top-line result included the major acquisition of Synthes, net of the divestiture of the DePuy trauma business. Still, even when excluding this impact, overall sales growth was 6%.

On a segment-by-segment basis, all of J&J's divisions contributed to the positive second-quarter performance, including the somewhat disappointing Consumer business. Indeed, Consumer sales neared $3.7 billion, representing an overall increase of 1%. Domestic revenues ticked up 1%, and international revenues rose 2% before negative currency translation effects of 1%. Management said positive contributors were upper respiratory over-the-counter medicines; TYLENOL and MOTRIN analgesics; LISTERINE mouthwash; baby care products; and women's sanitary protection products.

The Pharmaceuticals group impressed, as the division reported a top-line gain of 12%, to $7.0 billion, in the June period. Here, international sales climbed 17% before unfavorable currency impacts of 2%; domestic revenues rose 9%. Drugs that helped boost the top line were REMICADE and SIMPONI, biologics approved for the treatment of immune-mediated inflammatory diseases; STELARA, a biologic approved for the treatment of plaque psoriasis; INVEGA SUSTENNA/XEPLION, an antipsychotic for the treatment of schizophrenia; VELCADE, a treatment for multiple myeloma; PREZISTA, a treatment for HIV; and a number of recently launched products. The list of new drugs to the market that could become substantial growth drivers includes ZYTIGA, a medication for use in combination with prednisone for the treatment of prostate cancer; XARELTO, an anticoagulant; and INCIVO, an antiviral protease inhibitor for the treatment of hepatitis C.

Finally, the Medical Devices & Diagnostics group reported sales of $7.2 billion in the second quarter. Year-over-year growth was 10%, including a domestic advance of 10% and an international gain of 14% before negative currency translation effects of 4%. The lion's share, or about nine percentage points, of the overall growth was thanks to the acquisition of Synthes. Other contributors were the ACUVUE line of disposable contact lenses, Bionese Webster's electrophysiology products, and biosurgical product sales.

There was not much reaction on Wall Street to J&J's favorable performance, and JNJ shares ticked up ever so slightly following the earnings announcement. The stock continues to trade just shy of its 52-week high, however, and has a good deal of momentum behind it. One reason for the ho-hum reaction could be that management was hesitant to raise guidance by a considerable margin, even after putting together a very strong performance in the June quarter. In fact, the company only increased 2013 share-earnings guidance from $5.35-$5.45 to $5.40-$5.47. We were already expecting share net to come in at $5.43, while most on Wall Street were looking for share profits of $5.41. As a result, we only added $0.03 a share to our full-year target, which now stands at $5.46, but we actually cut $0.06 from our second-half estimates. Our top-line call is holding steady at $71.6 billion, which appears to be on the aggressive side.

As far as our investment advice is concerned, not a whole lot has changed. This blue chip stock offers an above-average dividend yield and is now trading just inside our 3- to 5-year Target Price Range, due to recent share-price gains. However, long-term capital appreciation potential has been on the low side for some time now. The above-average dividend yield is solid at 2.9%, but we now think there may be better options out there for income-seeking, risk-averse accounts.


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.