Diversified healthcare bellwether Johnson & Johnson (NYSE:JNJ) reported decent third quarter sales trends on October 18, though profits fell. Despite continued tepid near-term results, J&J stands out for its product and sales diversification. And though upside potential remains questionable, the stock has protected investors on the downside. Year-to-date, it is up 5% while the overall market is down about 5%.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Third Quarter Recap
Sales advanced 6.8% to $16 billion, though operational growth was quite modest at 2.6%. Positive currency fluctuations accounted for 4.2% of the total quarterly growth. International sales improved a healthy 8.3% organically, while positive foreign exchange movements boosted reported overseas growth to 16.4% and 57% of total sales. Domestic trends were more challenging, as sales fell 3.7% to account for 43% of total sales.

By product area, reported medical device sales rose 1.7% and represented close to 40% of the total top line. Pharmaceutical sales represented the next-largest category at more than 37% of total sales. This category saw sales jump 8.9%, as international sales rose 27.5% and offset a 6.1% domestic decline, due primarily to generic competition of bacterial-treatment drug Levaquin. Consumer sales made up the remaining 23% of sales and grew a healthy 4.9%, despite a number of remaining product recalls and "ongoing efforts to enhance quality and manufacturing systems".

A double-digit increase in selling costs and operating selling, marketing and administrative expenses sent operating income down 2.6% to $4.1 billion. Income tax expense also jumped in the double digits and sent net income down 6.3% to $3.2 billion, or $1.15 diluted earnings per share (diluted EPS). However, this still resulted in an impressive net profit margin of 20%. (To learn more about investment quality, check out: Find Investment Quality In The Income Statement.)

Outlook
J&J expects to report full-year earnings between $4.95 and $5 diluted EPS, excluding the impact of special items. Analysts currently project full-year sales growth of 6% and total sales of more than $65 billion.

Bottom Line
J&J trades at a reasonable forward P/E of 13 and sports an above-average dividend yield of 3.5%. However, growth in recent years has been an issue. Over the past three years, sales have barely budged, though earnings are up close to 10% annually on average. The five-year figures show stronger annual sales growth of 4%, but weaker profit growth of below 7%.

Compared to pure-play pharmaceutical rivals including Pfizer (NYSE:PFE) and Merck (NYSE:MRK), J&J has a clearer growth profile, though this is due in good part to its non-pharma divisions. The consumer unit should eventually see a sales rebound from a surprising number of product recalls and manufacturing deficiencies. The medical device unit also continues to benefit from strong demand and acquisitions, though pure-play rival Medtronic (NYSE:MDT) currently looks like a better bet at less than 10 times forward earnings. But J&J still represents one of the best ways to play a broad array of healthcare product categories across the globe. Abbott Laboratories (NYSE:ABT) is an equally compelling play and trades at a forward P/E of just over 11.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center