Johnson & Johnson (JNJ, Financial) has had a mixed quarter this time around. While its results were strong with demonstrated growth in many of its key pharmaceutical products, the medical devices segment continues its struggle. The company also has a string of lawsuits to deal with and was most recently in the news for its Covid-19 vaccine study being paused.
The management has raised its guidance for full year 2020, but the stock is more or less flat. Overall, I think the company has a decent outlook for the year and looks to be a good healthcare blue-chip to hold on to for steady (but not great) growth and yield.
The good – strong results and outlook
Johnson & Johnson reported a solid result for the third quarter of 2020 and managed to beat analyst estimates in terms of both revenues as well as earnings.
The company reported a top-line of $21.08 billion, which beat the analyst consensus by $921.79 million and was a 1.7% improvement over the corresponding quarter of the previous year.
The company had a strong performance in its largest segment, Pharmaceuticals, which grew by 5%, whereas the consumer health segment was slightly slow with a growth of 1.3%. The medical device segment was badly hit in the previous quarter with hospitals canceling non-essential procedures to prevent unnecessary exposure and make way for more Covid-19 patients. While this segment has shown some recovery, its revenues were 3.6% below the corresponding quarter of 2019.
In terms of geographical growth, the U.S. showed a 2.7% top-line growth for the company whereas the rest of the world was relatively slow at 0.6%.
Johnson & Johnson did manage to produce an earnings beat by reporting adjusted diluted earnings per share (EPS) of $2.20, a 3.8% improvement over the same quarter in 2019 and 22 cents above the analyst consensus. The management had been extremely conservative in terms of its prior outlook, which prompted analysts to produce a conservative estimate that the company could beat comfortably.
However, they have raised the guidance this time with expected revenues for 2020 up to a range of $81.2 to $82.0 billion from $79.9 to $81.4 billion and expected EPS up from a range of $7.75 to $7.95 to a range of $7.95 to $8.05.
Johnson & Johnson's two core pharma products, Darzalex and Imbruvica, were key drivers and showed strong growth. Darzalex revenues grew to $1.1 billion, a phenomenal growth of 43.8%, beating the analyst consensus estimate of $1.01 billion. On the other hand, Imbruvica showed an 11.3% growth and reported sales of $1.03 billion, though this number was below the analyst consensus of $1.08 billion.
Among the other top-performing products of the company were Stelara with revenue of $1.95 billion and a 14.7% growth, Tremfya with revenue of $327 million and a 13.1% growth, Uptravi with revenue of $260 million and a 23.6% growth and Invokana with a revenue of $224 million and a 24.7% growth.
All these brands fall within the largest segment of the company, Pharmaceuticals. The consumer segment also showed a decent growth, with key over-the-counter brands such as Tylenol analgesics and digestive health products, Listerine oral care products, OGX skin health and beauty products and Band-Aid adhesive bandages showing a decent performance.
The bad – pause in Covid-19 vaccine trials
Among other key updates, the study of Johnson & Johnson's Covid-19 vaccine has been paused due to an unexplained illness in a study participant. The company had made decent progress on the vaccine front and had constructed multiple vaccine candidates before identifying the lead candidate through pre-clinical testing in March 2020. It was carrying out its study in a large group of around 60,000 patients.
Such clinical trial pauses are not out of the ordinary given the large sample size. In fact, AstraZeneca (LSE:AZN) and Oxford University went through a similar ordeal when their study was put on hold recently because of a suspected adverse reaction in a patient in the U.K. The management of Johnson & Johnson has assured the market that it is a regular vaccine study pause and not a clinical hold and that it should resume the study soon.
The ugly – lawsuit concerns
Johnson & Johnson has been in the news for a number of lawsuits that affect investor sentiment negatively.
Most recently, the company was accused in a lawsuit of falsely promising billions of dollars in future payments to Auris Health investors when Johnson & Johnson acquired the company last year. Fortis Advisors have alleged Johnson & Johnson's executives deceived investors when they promised future payments based on the performance of Auris robotic systems designed to perform safer and more efficient lung biopsies.
This is certainly not the first big lawsuit against the company, and the management is in the process of settling quite a few claims, particularly in the baby powder lawsuits that have yet to be resolved. A Bloomberg report states that the company would be paying out close to $100 million to settle about a thousand cases in this regard, in addition to the $2.1 billion that the company has been ordered to pay by the courts. With many cases still pending, this number might go up. While it may not appear large given the huge scale of the company and its massive bottom-line, it certainly may deter investors from holding on to the stock.
Final thoughts
Johnson & Johnson has had a topsy turvy quarte,r which is why its stock price has remained more or less flat. The company's result was solid and prompted the management to improve the guidance for 2020, but the pause in the Covid-19 vaccine studies is certainly a bump on the road.
At its current price, the stock has a decent dividend yield of 2.64% and a five-year-yield-on-cost of 3.58% after taking into account the share buybacks, which makes it a decent portfolio holding for yield investors. However, with the background of the lawsuits and a current Enterprise-Value-to-Revenue multiple of nearly 5, I think the company's stock is at best a "Hold" at current levels.
Disclosure: No positions.
Read more here:
- These Stocks Are Bound to Benefit From the Zero-Contact Wave
- Splunk: New Momentum After Analyst Upgrades
- OLB Group: A Hidden Fintech Gem
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
