It wasn't that long ago that diversified healthcare giant Johnson & Johnson (NYSE:JNJ) could be relied on for double-digit sales and earnings growth. Patent expirations in its drug portfolio and a steady stream of product recalls have resulted in stagnant trends for roughly five years now. There is potential for a turnaround, but right now investors are favoring companies that are breaking into separate companies.

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First Quarter Recap
Sales declined a modest 0.2% to $16.1 billion. U.S. sales fell 5.1% and were almost offset by international growth of 4.1%, though when backing out positive foreign currency fluctuations, non-U.S. sales fell 2.3% and dragged total growth into negative territory at 1.2%. By business, pharmaceutical sales came in positive on a reported basis and were the only unit to post an increase. Consumer sales fell 2.4%, while the medical device unit logged a modest 0.3% decline.

A 5.4% decline in R&D expense to $1.6 billion helped send net income up 12.5% to $3.9 billion, or $1.41 per diluted share. However, management's estimate of continuing operations growth was more modest, at 1.5%. This backed out hip litigation costs related at the DePuy medical device unit, which competes with the likes of Stryker (NYSE:SYK) and Zimmer (NYSE:ZMH), as well as certain costs related to the upcoming acquisition of European medical device firm Synthes.

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Outlook and Valuation
Analysts project modest 2.2% sales growth and total sales of $66.5 billion for all of 2012. They currently expect earnings of $5.13, which, based on the current stock price of about $63 per share, represents a forward P/E of 12. This is below J&J's five-year average of 15.6 and also below the current industry average of 14.7.

The Bottom Line
J&J, along with European rival Novartis (NYSE:NVS), has decided that operating a diversified healthcare firm is in the best interest of shareholders. Other rivals, including Abbott Labs (NYSE:ABT) and Pfizer (NYSE:PFE), are pursuing strategies to separate the slower growing pharmaceutical operations from medical devices, consumer divisions and other non-drug businesses.

So far, the groups breaking apart their businesses appear to have the upper hand. J&J hasn't grown for a number of years now and has been subject to manufacturing mishaps in its medical device and consumer divisions. The market has also rewarded Abbott for its recent decision to break into two separate firms. That being said, there is turnaround potential at J&J as it regains its former glory, and its pipeline could have a few blockbusters that turn growth around.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Tickers in this Article: JNJ, NVS, PFE, ABT, SYK, ZMH

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