Diversified healthcare giant Johnson & Johnson (NYSE:JNJ) reported first-quarter profits on April 19 that beat analyst projections. The stock rallied a bit on the good news and pharmaceutical drug sales came in strong on new product launches. However, product recall costs continue to plague the company and growth trends have been anemic for several years now. Until J & J starts posting more consistent operating trends, a number of rivals look like better investment candidates.
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J&J's First-Quarter Recap
In the first quarter of 2011, total sales rose a modest 3.5% to $16.2 billion as organic growth of 1.8% combined with positive currency fluctuations of 1.7% to boost international and total company growth. The pharmaceutical division was the stand-out, with 7.5% growth to account for 37.5% of total sales as management stated sales of new drugs, including Stelara for the treatment of psoriasis and Simpon for the treatment of arthritis, posted strong performance. The medical device unit also posted decent growth as sales rose 3.3% to make up 39.8% of total sales on strong trends in glucose monitoring devices, disposable contact lenses and surgical care products.

The consumer unit made up the rest of the top line and saw sales fall 2.2% as product recalls, particularly in the McNeil Consumer Healthcare division, dented domestic sales by 13.8%. International sales continued to do well in the unit, rising 5.9%.

Reported net income fell 23.2% to $3.5 billion and earnings fell 22.8% to $1.25 per diluted share. The current quarter contained one-time litigation and recall charges, as did last year's first quarter. Backing out these non-recurring items, management estimated that earnings were $3.7 billion and $1.35 per diluted share, representing year-over-year growth in the low single digits.

Outlook for Johson & Johnson
Analysts currently project full-year sales growth of just over 4% and total sales of just over $64 billion. The company increased its earnings guidance and now expects full-year recurring profits between $4.90 and $5 per share for modest year-over-year growth of a couple of percent.

The strong pharma trends in Q1 are an encouraging sign for J&J and the company is staying active on the acquisition trail as well. It recently confirmed that management is talking with Swiss medical device firm Synthes about a potential $20 billion deal.

The Bottom Line
Despite its near-term woes, J&J remains extremely profitable. It didn't provide first-quarter balance sheet or cash flow data, but ended 2010 with close to $20 billion in net cash on the balance sheet and generated $14.5 billion in free cash flow, or approximately $5.21 per diluted share. (To learn more, see Free Cash Flow: Free, But Not Always Easy.)

J&J's forward earnings multiple continues to look appealingly low at about 12.4, but tangible signs of sustained sales growth and consistent profit expansion are still absent. As such, purer play rivals including Medtronic (NYSE:MDT), Teva Pharmaceuticals (Nasdaq:TEVA), Novartis (NYSE:NVS) and Stryker (NYSE:SYK) all look to have equally reasonable valuations given their projected growth rates over the longer haul.

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