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%.

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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.

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