“Johnson & Johnson, that’s an important name to the market. Robert: It is indeed. We sort of seeing sort of the best in class coming out first, the valedictorians are stepping out in their fields here with the Johnson & Johnson blue chip and Goldman Sachs, yeah, they came in, sort of are setting a positive tone, probably, you know, if you’re long this market you like to see them come out first and come up off the lows …” Fox Business 7/14/2009
Much of the focus in the media has been on Goldman Sachs’ (NYSE: ) blowout earnings release this morning, but the DJIA component Johnson & Johnson (NYSE: ) also reported and despite difficult conditions still earned in excess of analysts estimates. This should come as no surprise to those interested in JNJ because they have beaten consensus estimates for as far back as we have data; the last 20 quarters, dating back to Q3 of 2004. Similar to many of the past quarters, Johnson & Johnson did not blow out the numbers but did manage to slightly exceed projections. However, this was an exceptionally difficult quarter as JNJ had to deal with major currency headwinds as well as two major drugs losing patent protection.
Johnson & Johnson was expected to report profit of $1.11 per share on $15.02 billion in revenue, but the actual results were EPS of $1.15 and revenue of $15.24 billion. Because JNJ sees a lot of business abroad, the strengthening dollar had a huge effect on sales. For example, overseas sales slipped 8% on the quarter but when you back out the currency charges those sales would have been nearly 4% better than last year. The consumer health care segment and the devices operations segment both tallied less sales than a year ago, but had exchange rates not been a factor they both would have gained in the low single digits.
Aside from currency effects, the company’s drug unit, which normally accounts for about 40% of revenue, was the other weak point in the results. The unit was pressured by generic alternatives available for two of their best selling drugs Risperdal and Topamax. The loss of these patents in these drugs sent their sales reeling down more than two-thirds and accounted for about $1 billion in lost revenue. Of course the loss of patents on these two major drugs was not a surprise to JNJ management and they went about trying to refill the pipeline in the last quarter reaching an Alzheimer’s drug marketing deal with Elan Corp. (NYSE: ) and buying Cougar Biotechnology (CGRB) maker of cancer treatment drugs. Overall, the pharmaceuticals division’s sales fell 13% from a year ago.
The stock is trading a little more than 1% higher this morning reflecting that there weren’t any major surprises in the result. If recent history is your guide, then JNJ is about as consistent a performer as there is in the market. The company reaffirmed its full year earnings guidance of $4.45 to $4.55, and assuming that the company falls in the middle of that range then the company is trading at a multiple of about 13x.
By our methodology at Ockham, this company is Undervalued and has a long term (one to two years) potential of $70 or more. We are assuming earnings growth of about 5% into fiscal 2010, which we think is not a stretch and is less than the 8% growth of consensus estimates. Exchange rates will continue to be a key factor for this geographically diversified company with nearly half of revenue coming from overseas. Should the dollar weaken in the future, it would be a major benefit to JNJ and its investors. If you are looking for a stock that has shown strong performance consistently, no matter what market conditions it is facing, Johnson & Johnson may be for you. The drug sales are certainly a concern but this has not come as a surprise to management, and they will continue their search for the next blockbuster. Furthermore, the company has a strong tradition of raising their dividend which now yields 3.3%, which should make it an attractive long term holding.
