Johnson & Johnson (JNJ – Free J&J Stock Report), the world's largest maker of health care products and a member of the Dow 30, reported second-quarter adjusted share earnings of $2.10, nearly 15% above the similar year-ago period. Sales of $20.8 billion, were well above 2017's top line of $18.8 billion and $400 million greater than Wall Street was expecting. Excluding the impact of acquisitions and divestitures, worldwide sales rose 6.3% (+5.7% international and +6.8% domestic). On a GAAP basis, which we use in our presentation, J&J's share net was only $1.45, compared to last year's $1.40 and our estimate of $1.65. The reasons for the results being lower than our forecast were a $1 billion expense taken for various writeoffs, and a $400 million after-tax intangible amortization charge.
The key Pharmaceutical segment, which is responsible for half of the company's revenue, turned in a solid performance. Helped by the addition of the Actelion acquisition, sales rose almost 20%. On an apples-to-apples basis, this still translates into a favorable increase in worldwide sales of 11% (+11.9% international, +10.2% domestic). Leading the way was strong demand for drugs such as STELARA, a biologic for the treatment of immune-mediated inflammatory diseases, ZYTIGA, an oral medication used on patients with prostate cancer, DARZALEX, for the treatment of multiple myeloma, IMBRUVICA, an oral therapy for treating certain B-cell malignancies. Also contributing were REMFYA (plague psoriasis), SIMPONI (inflammatory diseases), INVEGA SUSTENNA (antipsychotic), and XARELTO (anticoagulant). During the quarter, the FDA approved an additional indication for DARZALEX and the European Commission granted marketing authorization for JULUCA, which is used in treating HIV-1.
Accounting for about one third of J&J's total revenues, the Medical Devices segment posted modest quarterly gains. Domestic sales rose a sluggish 1%, while foreign sales climbed 6% because of currency exchange rates. On an operational basis, the top line grew 2.5%. The Vision business continues to do better than expected, in part driven by healthy demand for ACUVUE contact lenses. Also chipping in were electrophysiology products in the Solutions business, biosurgicals and endcutters in the Advanced Surgery business as well as wound closure and trauma products. Offsetting some of this were declines in the Diabetes Care and spine devices in the Orthopaedics segments. Management announced during the quarter that it had accepted a $2.1 billion bid for its LifeScan operations as well as a $2.8 billion binding offer for its Advanced Sterilization business. (Both deals are subject to normal closing procedures.) We think that these divestitures are a positive as they free up funds for investment in more promising areas of J&J.
The company's famed Worldwide Consumer business continues to struggle. Following what appeared to be a modest recovery in the first quarter, sales increased a marginal 0.7% in the June period. Taking a closer look at the numbers and the news is worse than it appears. There was actually a 0.4% decline in operational sales that was only lifted into positive territory by currency translations. With some of the most identifiable consumer products in the world, it appears that J&J isn't immune to the weakness in the consumer staples sector. TYLENOL and NEUTROGENA both turned in good showings, but the famed baby care products posted lower sales once again.
Management's guidance for the remainder of the year did not change much from previous estimates provided earlier in the year. Total sales are expected to be slightly higher in a range of $80.5 billion to $81.3 billion. Adjusted share earnings are now anticipated to come in a few pennies better at $8.07-$8.17.
Last week, the company lost a major legal case in the state of Missouri. The 22 plaintiffs, who claimed that the use of J&J's talcum powder caused ovarian cancer, were awarded $4.7 billion by a jury. This is not the first time that J&J has lost such a court case. However, it has been successful in having the suits dismissed on appeal. The same process will be followed here. To date, over 9,000 cases accusing J&J's talcum power of causing cancer have been filed.
Since the end of April, JNJ has been a market laggard. The price of the stock has popped a bit after this morning's release, perhaps as part of a relief rally. Though the company faces several issues going forward, we believe that this could be a good entry point for investors. Its finances are among the strongest in the Value Line universe, and the equity gets very high marks for Price Stability and Earnings Predictability. In addition, the yield is a generous 2.8%. Indeed, most portfolios may want to include shares of this blue-chip stock.
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
