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Dow-30 Earnings: Johnson & Johnson – Second Quarter 2012
Johnson & Johnson (JNJ - Free J&J Stock Report), one of the largest healthcare companies in the world, has just reported second-quarter results. Sales came in at $16.5 billion, falling short of both our estimate of $16.8 billion and the year-earlier figure of $16.6 billion. Management said that underlying top-line growth was 3.5%, but the negative impact of currency translation was 4.2%. More specifically, domestic sales fell 1.2%, and international revenues dropped 0.4% (there was a 7.5% foreign exchange headwind). The recent addition of Synthes (more below) added 1.2% to worldwide sales growth.
GAAP share earnings from continuing operations were $0.50, though a slew of one-time charges associated with a partial write-down of in-process R&D and intangible assets, an increase in the accrual for the potential settlement of civil litigation matters, and transaction and integration costs related to the recently completed acquisition of Synthes totaled $0.80. The adjusted share-earnings figure of $1.30 was in line with our estimate and up two pennies from a year ago.
The Consumer segment continues to be a sore spot for J&J. The group reported sales of $3.6 billion, down 4.6% from a year earlier. Even after backing out unfavorable currency translation of 5.2%, underlying sales growth was a mere 0.6%. The baby and oral care businesses were the bright spots here, though the good news was offset by weakness on the women's health and wound care fronts.
Pharmaceutical revenues rose 0.9%, to $6.3 billion, as operational growth of 5.1% was largely mitigated by foreign exchange headwinds of 4.2%. Management noted that the positive contributors to growth were strong results of REMICADE, a biologic approved for the treatment of a number of immune-mediated, inflammatory diseases; PREZISTA, a treatment for HIV; and sales of recently launched products, which include ZYTIGA, INCIVO, STELARA, and XARELTO. On the downside, generic competition for LEVAQUIN and the manufacturing suspension at a third-party supplier for DOXIL hurt sales.
Finally, Medical Devices & Diagnostics revenues came in at $6.6 billion, a decrease of 0.1% versus the prior-year tally. Negative currency costs totaled 3.5%, which offset operational growth of 3.4%. Orthopaedic sales benefited from the recently completed acquisition of Synthes, and higher wound care and blood glucose monitoring product sales contributed to operational growth. Lower revenues from the cardiovascular care unit, which partly reflects the divestiture of the drug-eluting stent business a year ago, hurt results.
As mentioned above, the major development in the period was the addition of Synthes for $19.7 billion in cash and stock. J&J now operates one the world's most comprehensive orthopaedics businesses, even after the divestiture of DePuy's trauma business to Biomet. In addition, J&J Investment completed its first medical device acquisition in China, the purchase of Guangzhou Bioseal Biotech Company.
We have made some changes to our estimates. Despite the lackluster second-quarter sales performance, we have added $1.5 billion to our 2012 top-line target to account for the acquisition of Synthes. Our estimate is currently at $68.1 billion. We similarly added $3.2 billion to our 2013 revenue call, which now stands at $73.2 billion. We knocked off $0.08 from our full-year share earnings target, which is currently $5.04, to account for the likelihood of lower EBITDA margins in the second half. (Our target is near the mid-point of management's revised share-net guidance of $5.00-$5.07.) On the bright side, we have added a nickel a share to our 2013 profit target, which is now $5.50.
The reaction to the earnings announcement among investors was mild, as JNJ shares initially dipped slightly from the near 52-week high they were previously trading at. Given that the major drivers of the top- and bottom-line weakness were foreign exchange factors, we were not surprised.
As far as our recommendation goes, we still like JNJ stock as a long-term holding for just about every type of portfolio. The 3- to 5-year picture is very bright; the above-average dividend yield is a big plus; and this stock is one of the more stable issues out there. On the downside, we expect JNJ shares to trade in a fairly narrow range in the near term, or at least until the company can break out of its recent slump.
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.