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Weak Dollar And Low Valuation To Boost J&J
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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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.
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.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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