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J&J Will Get Well Soon
Healthcare bellwether Johnson & Johnson (NYSE:JNJ) reported third-quarter results earlier in the week that served as a further indication the firm is in a turnaround phase. Anemic growth in many operating segments remained and product recalls damaged sales in a consumer segment that used to be relied on for steady results. Conditions will improve at some point, but the current investment appeal is questionable.
IN PICTURES: 5 Tips To Reading The Balance Sheet
Third Quarter Sales Review
Sales fell a slight 0.7% to $15 billion. By major operating segment, pharmaceutical sales grew a very respectable 4.7% to account for almost 37% of total sales. Domestic pharma sales grew faster than international sales as the company singled out Remicade, Prezista and Intelence as branded drugs that experienced "strong operational growth."
Medical device sales grew 1.3% to account for nearly 40% of the total top line as sales grew modestly in every global region. The Cordis stent franchise, which competes with the likes of Medtronic (NYSE:MDT) and Boston Scientific (NYSE:BSX), saw sales struggle and fall nearly 7%, but that fall was offset by strength in Ethicon surgery products and the vision care units. (Learn more about investing in this space in Measuring The Medicine Makers.)
Consumer segment sales accounted for the rest of quarterly sales and saw sales fall 10.6% as domestic sales fell a dramatic 24.5%. International sales were about flat. The unit was hit by a number of factors, including product recalls, the suspension of manufacturing and the Venezuelan currency devaluation.
Profit Recap and Outlook
Total company operating income fell 0.6% to $4.2 billion as a 3.6% increase in product costs was offset by a 1.2% drop in selling, marketing and administrative expenses. However, a 28% operating margin showed that J&J remains impressively profitable, even if it isn't growing much right now. Lower taxes helped net income grow modestly, or 2.2% to $3.4 billion. Diluted earnings per share reached $1.23.
Despite the weak quarter, management boosted its full-year earnings guidance and now expects earnings between $4.70 and $4.80 per diluted share. For the full year, analysts project sales will grow 0.8% and reach more than $62 billion.
Challenges Ahead
Based off the current guidance, shares of J&J currently trade at a forward P/E of about 13.5. This is a reasonable valuation given the firm is being hit by product quality concerns and isn't growing that fast on an organic basis. Bolt-on acquisitions, such as the purchase of Dutch biopharma firm Crucell NV (Nasdaq:CRXL), will boost total growth slightly. The problem is that J&J must add billions of new sales each year to keep growth moving forward. With troubles in the consumer division and patent expirations in the pharma unit that are similar to the uphill battles pure-play rivals such as Eli Lilly (NYSE:LLY) possess, total company growth is going to be challenging.
Bottom Line
Finding investment appeal in the stock is also difficult. On the one hand, the valuation is reasonable, the current dividend yield is high at 3.4%, and the firm known for controlling costs and is diversified across industries and geographies. However, growth potential will likely remain constrained for some time and the valuation is hardly at bargain-basement levels. (To learn more, see our Guide To Investing In Consumer Staples.)
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IN PICTURES: 5 Tips To Reading The Balance Sheet
Third Quarter Sales Review
Sales fell a slight 0.7% to $15 billion. By major operating segment, pharmaceutical sales grew a very respectable 4.7% to account for almost 37% of total sales. Domestic pharma sales grew faster than international sales as the company singled out Remicade, Prezista and Intelence as branded drugs that experienced "strong operational growth."
Medical device sales grew 1.3% to account for nearly 40% of the total top line as sales grew modestly in every global region. The Cordis stent franchise, which competes with the likes of Medtronic (NYSE:MDT) and Boston Scientific (NYSE:BSX), saw sales struggle and fall nearly 7%, but that fall was offset by strength in Ethicon surgery products and the vision care units. (Learn more about investing in this space in Measuring The Medicine Makers.)
Consumer segment sales accounted for the rest of quarterly sales and saw sales fall 10.6% as domestic sales fell a dramatic 24.5%. International sales were about flat. The unit was hit by a number of factors, including product recalls, the suspension of manufacturing and the Venezuelan currency devaluation.
Total company operating income fell 0.6% to $4.2 billion as a 3.6% increase in product costs was offset by a 1.2% drop in selling, marketing and administrative expenses. However, a 28% operating margin showed that J&J remains impressively profitable, even if it isn't growing much right now. Lower taxes helped net income grow modestly, or 2.2% to $3.4 billion. Diluted earnings per share reached $1.23.
Despite the weak quarter, management boosted its full-year earnings guidance and now expects earnings between $4.70 and $4.80 per diluted share. For the full year, analysts project sales will grow 0.8% and reach more than $62 billion.
Challenges Ahead
Based off the current guidance, shares of J&J currently trade at a forward P/E of about 13.5. This is a reasonable valuation given the firm is being hit by product quality concerns and isn't growing that fast on an organic basis. Bolt-on acquisitions, such as the purchase of Dutch biopharma firm Crucell NV (Nasdaq:CRXL), will boost total growth slightly. The problem is that J&J must add billions of new sales each year to keep growth moving forward. With troubles in the consumer division and patent expirations in the pharma unit that are similar to the uphill battles pure-play rivals such as Eli Lilly (NYSE:LLY) possess, total company growth is going to be challenging.
Bottom Line
Finding investment appeal in the stock is also difficult. On the one hand, the valuation is reasonable, the current dividend yield is high at 3.4%, and the firm known for controlling costs and is diversified across industries and geographies. However, growth potential will likely remain constrained for some time and the valuation is hardly at bargain-basement levels. (To learn more, see our Guide To Investing In Consumer Staples.)
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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