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Dow-30 Earnings: Johnson & Johnson - Fourth Quarter 2012
Diversified healthcare company Johnson & Johnson (JNJ - Free Johnson & Johnson Stock Report) recently reported fourth-quarter results and issued guidance for 2013. Revenues rose 8%, to $17.6 billion, which was $76 million lighter than our target and $112 million below the consensus estimate. Share earnings came in at $0.91, though there were some special items related to an increase in litigation accrual and program costs associated with its recalled artificial hips, in-process R&D, and integration expenses related to the recent acquisition of Synthes. Excluding these one-time charges, share net was $1.19, a 5% bump from a year ago. Both Value Line and Wall Street analysts, on average, were looking for share profits of $1.17. Finally, management released share-earnings guidance of $5.35-$5.45 for 2013, which would represent a decent 5%-7% advance from the $5.10 netted in 2012. However, we were expecting the range to be a bit higher, as our 2013 share-net estimate was $5.48.
Looking deeper, the fourth-quarter top line was up 8%, as operational gains amounted to 9% and the negative impact of currency translation was 1%. Domestic revenues were up 7%, which was much better than we were expecting, while international sales were a bit softer than expected at 9%. The acquisition of Synthes, which was completed in June of 2012, accounted for about two-thirds of worldwide top-line growth in the final period. Full-year sales growth was just 3%, and it split almost evenly between J&J's domestic and foreign operations (after accounting for unfavorable) foreign exchange. Synthes was responsible for almost the entire sales advance, and, not surprisingly, all of the growth came in the back half of the year.
After breaking out the segment results, we were not shocked to see that the Consumer division's sluggishness continued in the fourth quarter. Revenues were $3.7 billion, down less than 1% on a year-over-year basis, as softness in the U.S. was mostly offset by gains overseas. Over the course of 2012, Consumer sales dropped 3%, to $14.4 billion, owing to a combination of weakness in the domestic marketplace and unfavorable currency translation. Positive contributors here were oral and skin care products as well as over-the-counter upper respiratory offerings. The Pharmaceutical group fared much better in the final stanza, reporting sales of $6.5 billion. The business grew nicely at home and abroad, and the total gain was 7%. For the year, the top line was $25.4 billion, up 4%, and notable drugs were REMICADE, VELCADE, PREZISTA, and some recently launched offerings. Finally, the Medical Devices & Diagnostics business was the standout performer in the fourth quarter. Both domestic and international sales climbed 14%, and total revenues were $7.4 billion. For the full year, the group's top line was $27.4 billion, an advance of 6%. The Synthes addition was the driving force here, though a number of products in the specialty surgery, electrophysiology, and disposable contacts units also had strong showings.
Management appeared mostly pleased with the results and seemed optimistic about the company's future, stating that recent acquisitions, investments, and pipeline developments have positioned J&J well for delivering sustainable growth. However, the company's shares were down a bit after the release, likely due to the softer-than-expected guidance for 2013. The new charge for recalled hips did not help J&J's cause either.
We have updated our full-year 2013 targets. We cut $300 million from our sales estimate, which now stands at $72.1 billion and represents growth of 7%. In addition, we trimmed a nickel a share from our previous earnings target, so we expect profits of $5.43 a share in the coming year. This would be a 6% advance.
As far as our investment advice is concerned, the song remains the same. We still recommend top-quality, high-yielding JNJ stock for most portfolios, but caution that it is trading at the top of a pretty significant range. We had surmised that if 2013 earnings guidance was strong, these shares would rise through the $73 ceiling and a new range would be formed. Now, however, we expect the stock price to remain in a reasonably tight band in the coming six to 12 months. Longer-term capital gains potential is just modest, but total-return potential is worthwhile and especially well-defined.
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.