What Were The Major Takeaways From Johnson & Johnson's First Quarter Earnings?

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Apr 16, 2015

U.S. healthcare conglomerate Johnson & Johnson (JNJ, Financial) reported its first-quarter earnings for the fiscal year 2015 on Tuesday, April 14, and left analysts and investors wondering how it was able to beat the Street expectations both in terms of top and bottom line growth. However, the management has provided a cautious guidance going forward as there are temporary headwinds trying to spoil the healthcare giant’s number show. Let’s quickly take a look and find out the major points that were shared during the earnings call that could aid in taking a brisk decision on investing in the Johnson & Johnson stock. In fact, soon after the earnings were out, the stock moved ahead and rose in the premarket trading.

Revenue dips, though both revenue and earnings beat estimates

The strong dollar means happy times for many consumers in the international markets, but it’s a pain for healthcare companies like Johnson & Johnson that earn in foreign currencies at international locations and then convert such earnings back into dollars for reporting purpose. In fact, during the quarter the negative impact of the strong dollar created a drag of 7.2%. Such a major headwind linked to currency rate fluctuations is beyond the company control, but it did affect the top line of Johnson and Johnson that showed a decline of 4.1% year over year from $18.1 billion reported a year ago, to $17.4 billion in the first quarter of the fiscal year 2015. While domestic sales rose 5.9% in the quarter, international sales fell over 12.4% due to the negative currency impact of 13.2%. Barring such negative impact of the strong dollar, international sales were down 3% in the first quarter of the fiscal year 2015.

However, the revenue reported for the quarter surpassed the Street estimates that were standing at $17.31 billion. This reflects that even in the presence of temporary headwinds such as currency rate movements, the company’s revenue was pulled up mainly by the better performance of its pharmaceutical division. The earnings per share were at $1.56 a share, up from $1.54 a share in the year-ago period. The EPS also beat the consensus estimate by around $0.02 a share for the first quarter.

Pharma segment performs better, but medical devices unit under strain

While the domestic and international pharmaceutical business grew on a constant currency basis, the medical devices unit saw a comparative decline in sales due to divestitures and intense competition from immediate rivals.

While the blood cancer drug, Imbruvica, saw sales improve from $10 million in first quarter of 2014 to $116 million in first quarter of 2015, the revolutionary type 2 diabetes drug Invokana brought in $278 million in the first quarter of this fiscal year. In fact, Invokana’s sales growth saw a sequential quarterly increase of 38% from $201 million reported a year earlier in the same quarter. The oncology section and immunology section also showed better growth in sales and did reflect upon the overall growth in the pharmaceutical division of Johnson & Johnson.

However, analysts do not expect any sort of catalyst to improve the performance of the medical devices unit which is currently under stress. Excluding the impact of currency movements, the growth in the medical devices unit sales was only by 1.3% in the first quarter on a worldwide basis, which included 1.1% growth in the U.S. and 1.5% growth overseas. In fact, it is being assumed that the healthcare giant might further divest this section to focus on its profitable pharmaceutical business unit.

During the earnings call, CEO Alex Grosky stated, “The company delivered strong underlying growth in the first quarter driven by new products and the strength of the core business. Of note is the continued robust growth of the Pharmaceutical business and the solid performance of our Consumer brands…”

Dividend payout remains firm adding to investors’ relief

The management has projected a dividend payout ratio of 45% in 2015, though no dividend increase was formally announced during its quarterly earnings call. This means that the company might announce a dividend hike in its annual shareholder meeting which is scheduled on April 23. This could sound like music to the ears of the investors as Johnson & Johnson has truly been a dividend paying stock through the years. In fact, if the management increases the annual dividend payout for the fiscal year 2015, it would be the 53rd year in a row when such an event would happen. So, all eyes are waiting for the annual shareholders meet where things regarding the dividend payout will become clearer.

Guidance is a bit weak but seems to be a cautious strategy taken

It is to be noted that the diversified healthcare conglomerate has lowered its earnings guidance for the entire fiscal year 2015, as it believes that the negative impact of currency rate movements is bound to continue into the near future.

Barbara Ryan, partner at strategic adviser Clermont Partners, stated shortly after the earnings release, “People can figure out what the move in the currency has been, and we're fairly used to this. This was already factored in to expectations. So you see now impact from the lower guidance…” Presently the earnings guidance for the full fiscal year stands at $6.04-$6.19 per share which the company said reflects the impact of foreign currency movements that has become a major challenge for this fiscal year.

Parting word

Johnson & Johnson is a well-diversified healthcare company and it knows how to grow amid such currency headwinds. However, the company has taken a cautious stand while looking into the upcoming quarters of the fiscal year. One thing remains understood: Johnson & Johnson is now trying to put all its focus on the pharmaceutical segment which could aid in pulling up the revenue further, irrespective of currency headwinds. Also the dividend hike might be likely on the cards and investors are waiting to find out if such an event takes place on April 23. Let’s stay tuned and keep an eye on the further moves of the company. But till now, Johnson and Johnson’s strong product portfolio and growth potential does seem to be major attributes to be considered while investing in the stock for the long term.