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Dow-30 Earnings: Johnson & Johnson – Third Quarter 2013
Global healthcare conglomerate Johnson & Johnson (JNJ - Free Johnson and Johnson Stock Report) recently reported third-quarter results. Sales came in at $17.6 billion, up 3% from a year ago, which was in between our estimate of $17.7 billion and the Wall Street consensus of $17.5 billion. Management said that operational advances tallied 5%, while currency translation cost 2%. On the home front, the top line rose 2%, and international net revenues rose 4%. GAAP profits and share earnings were $3.0 billion and $1.04, respectively, but the results included a few one-time charges related to litigation, in-process research & development, and integration and transaction expenses. Excluding these items, the bottom line came in at $3.9 billion, and share net was $1.36, representing advances of 11% and 9%, respectively. This easily topped expectations, as we were looking for share earnings of $1.31.
Consumer revenues of $3.6 billion rose 1% in the September period, as internal gains of 2% were offset by currency translation effects of 1%. Results here were boosted by higher sales of TYLENOL and MOTRIN; baby care products; AVEENO skin care offerings; and over-the-counter upper respiratory medicines. This group has been under pressure for some time now, so investors should be pleased to see this positive top-line contribution.
The Pharmaceutical group was the biggest contributor to the overall top-line gain and earnings surprise, as total sales came in at $7.0 billion. This represents a 10% advance from a year ago, as operational growth of 11% was bogged down by unfavorable foreign exchange of 1%. The segment posted strong, double-digit growth overseas, which was in line with our expectations. Management said established products, such as INVEGA SUSTENNA/XEPLION (antipsychotic); REMICADE and SIMPONI (inflammatory diseases); STELARA (plaque psoriasis and psoriatic arthritis); VELCADE (myeloma); and PREZISTA (HIV), were the primary contributors to growth. Sales of new offerings, such as ZYTIGA (prostate cancer), XARELTO (anticoagulant), and INVOKANA (type-2 diabetes), also boosted sales. In addition, there are several new drug applications in the works, which could propel the top-line even higher in the not-too-distant future.
Finally, the Medical Device & Diagnostics division posted sales of $6.9 billion in the September interim, which was down 2% from last year. Operational results were flat, and the currency translation drag was 2%. Positive contributors to operational growth were electrophysiology products in cardiovascular care, joint-reconstruction and surgical care offerings, etc.
Investor reaction to J&J's third-quarter earnings release was mostly muted, as JNJ stock inched forward less than 1% in early trading hours. It has been a bumpy ride for JNJ holders over the last six months, or so, as the equity has traded as high as $94 and as low as $86.
We have made a few changes to our model. We have reduced our full-year sales target by $0.1 billion, to $71.3 billion. We continue to look for healthy drug-related sales gains and believe currency translation will be less of a factor in the fourth quarter, but we think the Consumer business will report marginal growth and surmise the Medical Device & Diagnostics group may struggle again. We did, however, bolster our 2013 share-earnings estimate by two pennies, to $5.48, which is near the high end of management's guidance range ($5.44-$5.49). We like the near-term profit story, and believe slight EBITDA expansion is in the cards.
Not too much has changed from an investment standpoint when it comes to JNJ. The stock is as stable as they come and the dividend yield of 3.0% is worthwhile, making JNJ an optimal choice for conservative investors. On the downside, even though we think the company will be able to deliver solid and sustainable growth over the long haul, 3- to 5-year appreciation potential leaves a bit to be desired.
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.