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Alex Morris
Alex Morris

Johnson & Johnson, First Quarter 2011 Highlights

April 25, 2011 | About:

Johnson & Johnson (JNJ) reported earnings on April 19, and delivered strong results and a guidance increase that caused the stock to advance nearly 6% (up to $64.07) during the last three days of trading for the week. The big story over the weekend was about Synthes Inc., which confirmed on Monday that they were in discussions with Johnson & Johnson’s management in regards to a potential acquisition; the purchase, which would likely have a price around $20 billion, could be the much anticipated catalyst to drive sluggish growth after the spate of recalls. For now, let’s stick with the quarterly results; here are some of the highlights from the conference call and some interesting notes from the 8-K (as always, this is not a substitute for reading the filings):

Sales for the first quarter increased 3.5% year over year (1.8% operational), and were largely driven by a 7.5% increase (9.7% internationally) in the Pharmaceutical business segment to $6.1 billion. As I noted in a previous article (here), Johnson & Johnson has seen recent success from their pharmaceutical innovation, and achieved the top sales among competitors of products launched in 2009 and 2010 ($844.5 million), outpacing the second in line by more than 7%. This trend has continued, with worldwide sales of Stelara increasing more than 90% YOY to $166 million (in the quarter), and sales of Simponi increasing by more than 100% to $95 million. As noted on the call, the strong growth achieved by STELARA and SIMPONI helped the company maintain their leadership position in immunology in the United States.

Worldwide Consumer sales decreased 2.2% to $3.7 billion, and were negatively affected by a 13.8% decline in domestic sales (largely due to U.S. OTCs). Lastly, Medical Devices & Diagnostics increased 3.3% YOY to $6.4 billion, driven by a 6.6% increase in international sales. On the regional breakout, Asia-Pacific, Africa continues to grow, with sales increasing by 13.4% (6.3% operational) to nearly $3 billion, and strong international expansion is helping to mitigate the current domestic issues.

Running down the income statement, we can see that research and development increased to $1.74 billion in the quarter, mostly due to milestone payments. However, it’s important to note that the company is maintaining strong levels of R&D spending, which will lead to the next line of innovate new products; this commitment is indicative of a company with a fortress balance sheet and strong free cash flow generation, which greatly outweigh the affects of the recalls. The company also noted, as expected, that an increase in marketing spend will accompany the product launches (from the recalled items) starting in the back half of the year, which is also a testament to the aforementioned operational and financial strength at Johnson & Johnson.

For reported GAAP, diluted EPS decreased nearly 23% to $1.25; net litigation had a significant impact on reported earnings, which favorably impacted earnings by $0.33/share and negatively impacted earnings by $0.10/share in Q1 2010 and Q1 2011, respectively. When adjusted for these charges, Johnson & Johnson reported an increase of 4.7% in diluted EPS; I’d like to note that I personally don’t blindly accept these as special/one-time charges (especially the $55 million DePuy recall costs), and suggest investors take these reported numbers with a grain of salt.

Part of the move after earnings was due to an increase in guidance for the year. As management noted in their expectations for the year, “our reported EPS, excluding special items, would be between $4.90 and $5 per share for a reported EPS growth rate of approximately 3% to 5%.” As I laid out in my April submission for the value contest (here), the valuation at the time was implying 3.55% annual growth over the next ten years, followed by 3% growth in perpetuity. Even with the short term issues, it appears that results may exceed the pessimistic valuation that Johnson & Johnson reached. For long term investors, the game plan hasn’t changed: sit back, collect those juicy dividend checks (which have increased in 48 consecutive years and counting), and wait for the fundamental strengths of the business to outweigh short term setbacks over the coming years.

About the author:

Alex Morris
I am a recent graduate from the University of Florida; I received a finance degree as well as a real estate minor during my time at UF. I will be sitting for Level 1 of the CFA Exam in December 2011, as well as for my series 65 exam. I am a value investor, plain and simple.

Rating: 4.3/5 (9 votes)


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