We have decided to change the way we present earnings for Johnson & Johnson (JNJ – Free J&J Stock Report) after the healthcare products maker and Dow-30 member announced its 2019 fourth-quarter and full-year results. We will now be picking up the adjusted earnings figure and will revise the results for each of the first three quarters of 2019 accordingly. (We will not be restating previous-year numbers). Supporting our decision, management is only providing guidance on an adjusted basis, claiming that it is too difficult to predict the outcomes of likely legal proceedings at this time (more details below).
The global conglomerate had some difficulty in the December quarter. Adjusted earnings came in at $1.88 a share, below the year-earlier mark of $1.97. The top line clocked in at $20.747 billion, increasing just 1.7%, due to weaker domestic demand and currency headwinds on the international side of things. Indeed, international sales growth was virtually cut in half by unfavorable translation rates, to 2.1% for the quarter.
On a segment basis, Medical Devices was the worst performer from a sales standpoint, inking a 0.5% decline. The Consumer unit was only slightly better, posting a 0.9% increase, as demand for baby care products remained light due to ongoing concerns about the safety of some of the company's goods. Remember, there have been claims that its talc-powder products contain traces of asbestos. While Johnson & Johnson leadership has refuted these accusations, even submitting multiple tests with results pointing to the contrary, demand has waned, nonetheless. On a positive note, the Pharmaceutical business continued to lead the way, reporting a 3.5% sales gain (4.4% on a constant currency basis). That said, not all of the news there was positive, as sales of one of its biggest products, REMICADE, were down 16.4%.
Our new 2020 earnings estimate stands at $9.05 a share (previously $7.70), to reflect better margins. This is well within management's $8.95-$9.10 forecast and represents a 4.3% increase over the $8.68 earned for all of 2019. We now look for sales to come in at $85.85 billion (up from our previous $85.0 billion assumption), modeling for roughly 4.5% growth. The company's top-line guidance is $85.4 billion to $86.2 billion.
The stock trickled slightly lower in price on the release, but is up nicely since our November review. In fact, it recently etched a new high-water mark in recent days. The company's efforts to disprove accusations of safety concerns regarding its baby powder seem to have helped, but speculation remains. Meantime, the opioid epidemic is likely to persist as a headwind for the Pharmaceutical business. All told, legal costs could stay elevated for some time. The company's size and finances should help lessen the impact, but we think that investors will want to be a bit cautious here. The recent share-price momentum discounts a fair portion of the gains we envision out to 2022-2024 and the stock offers below-average price appreciation potential at this juncture.
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).
– Andre J. Costanza
