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Tickers in this Article: JNJ, FRX, ELN, TEVA, MYL
Diversified healthcare giant Johnson & Johnson (NYSE:JNJ) reported third quarter results on Tuesday that beat analyst profit targets. However, sales came in a bit light of expectations on the continued struggles of a key division. Forward trends also remained tepid, but there are a couple of investment merits that should eventually allow J&J's share price to increase markedly.
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Recent Results
Total third quarter sales fell 5.3%, to $15.1 billion, which consisted of a 2.8% decline in operational results and 2.5% drop from negative currency fluctuations. International sales grew 2.4% in constant currencies, but fell 2.5% on a reported basis when taking into account exchange rate changes. Domestic sales fell a more dramatic 8.1%, primarily from a 19.2% plummet in pharmaceutical sales (34.8% of total quarterly sales) as drugs such as Risperdal and Topamax face generic competition. Teva Pharmaceuticals (Nasdaq:TEVA)and Mylan (NYSE:MYL) offer generic forms of Risperdal and Topamax, respectively.

Surprisingly, consumer sales (26.5% of total quarterly sales) also fell 4.4% on double-digit declines in baby care and women's health and an 8.3% fall in oral care. Consumer sales grew 5.2% overseas in constant currencies. Medical (38.7% of total quarterly sales) device sales grew in both primary geographic locations, rising 4.1% worldwide.

Cost controls and share buybacks helped minimize the sales deterioration impact on the bottom line, as earnings increased 2.6% to $1.20 per diluted share. Analysts expect full-year earnings to fall ever-slightly to $4.55 per share, as compared to the $4.62 per basic share reported last year. The current consensus calls for full-year sales to fall 4.4% as drug patent expirations will continue offset strong international organic sales and profit trends.

The Bottom Line
A strong U.S. dollar has also hurt results for some time, though this appears to be reversing course and will benefit multinational firms such as J&J. International sales accounted for 51.5% of the quarterly top line total. Management also relies on a hefty dose of acquisitions to boost organic growth and announced it "completed the acquisition of substantially all of the assets and rights of Elan (NYSE:ELN) related to its Alzheimer's Immunotherapy Program as well as an equity investment in Elan." Forest Labs (NYSE:FRX) currently sells Namenda, one of the only approved Alzheimer's drugs currently.

Given current earnings guidance for the current fiscal year, shares of J&J are trading at a forward P/E multiple of 13 times. This is quite reasonable and at the very low end of the stock's five-year P/E range of 11-times to 24-times. It may be a couple of more years until sales and earnings growth consistently return to positive territory, but a weak dollar will help matters on a reported basis, and there is some room for multiple expansion. (For more, see 5 Must Have Metrics For Value Investors.)

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