Johnson & Johnson (JNJ – Free J&J Stock Report), the world's largest producer of health care products and a member of the Dow 30, reported first quarter GAAP share earnings of $1.60, compared to last year's $1.61 figure, and our estimate of $1.85. On an adjusted basis, which excludes a $0.36-a-share amortization expense, along with another $0.10-a-share in charges resulting from five separate additional items, share earnings came in at $2.06, modestly better than the Wall Street consensus number of $2.02. The company also reported higher-than-expected sales of $20 billion, a 12.6% increase above 2017's tally. On an operational basis (not counting acquisitions and divestitures), this still represented a healthy 4.3% increase. Weakness in the U.S. dollar provided a boost to both profits and revenues. Investors seem slightly disappointed by the earnings release as J&J's stock price has fallen while the broader market indices are up about 1%.
The key Pharmaceutical sector turned in a solid performance. Responsible for almost half of the company's total sales, domestic revenues climbed 9.9%, while international sales surged 22.5% (33.1% when currency translations are taken into account.) Strong demand for oncology drugs was the main driver of growth here. Sales rose 37% on an operational basis (45.0% after foreign exchange translations). According to management, the two principal cancer drugs; DARZALEX and IMBRUVICA, which combined for $3 billion in sales in 2017, experienced a strong uptake at home and abroad. ZYTIGA, a medication used for treating prostate cancer, also fared well. Demand for drugs in the Immunology space was more mixed, however. STELARA (Crohn's disease), TREMFYA (plaque psoriasis), and SIMPONI (rheumatoid arthritis) was robust, while the blockbuster drug REMICADE (an agent used in immune-mediated inflammatory diseases) continued to struggle due to increased competition from biosimilars in the U.S. market.
Responsible for more than a third of total revenues, the Medical Devices segment turned in a flattish operational performance as revenues rose 1.1%. Driven by growth of 15% in Electrophysiology, the Interventional Solutions group performed well. Moreover, although Vision Care only accounted for $1.1 billion in quarterly sales, it registered a top-line gain of almost 35%. Finally, the Surgery segment did slightly better, rising 2.2%. Offsetting these positive developments were Orthopaedics, whose sales fell 4.6%.
There was finally good news coming from the company's Consumer sector. Home to some of the most iconic brand names in the world: (TYLENOL, LISTERINE, and BAND-AID among many others), sales here grew 2.0% on a worldwide basis. This sector has been weak in the past, as consumers have been switching to cheaper, private-label brands. We are not sure if this is the beginning of a trend or a one-time event. In either case, the results were encouraging.
Management also announced an increase in 2018 full-year top-line guidance from a midpoint of $81 billion, to $81.4 billion. This is based on the assumption of operational growth of 4%-5%. In addition, the company lowered its estimates for other income by $200 million, cut interest costs projections by $100 million, and expanded the forecast for an improvement in the adjusted pre-tax operating margin by 50 basis points to 150 basis points. We should note that in the first quarter, revenue growth was not sufficient to keep pace with operating expenses. For 2018, the company still expects adjusted earnings of about $8.10 a share, reflecting operating growth of 6.8%-9.6%. We have decided to lower our GAAP share earnings by $0.25 to $7.25. Over the past few months, JNJ has underperformed both the DJIA and S&P 500 Index by a fair margin. Thus, this may represent a nice entry point for risk-averse, long-term investors. On the positive side, the company has one of the strongest balance sheets in America, and the yield on the dividend is now a generous 2.6%. Furthermore, JNJ gets very high marks for Price Stability and Earnings Predictability. Conservative investors may want to consider this stock as a core holding.
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).
— James Flood
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
