Income · Stocks to Consider and Updates

Johnson & Johnson Beats Street Views; Hikes Outlook

Health care products giant Johnson & Johnson (NYSE: JNJ – $133.41) reported third-quarter financial results that were better than expected. For the period, J&J came in with adjusted earnings of $2.12 per share vs. $2.05 last year and eleven cents ahead of Street estimates. The top line increased 1.9% over the year-earlier third quarter to $20.7 billion, ahead of the consensus for $20.1 billion. In the US, sales rose to $10.8 billion from $10.7 billion last year and were up 2.6% to $9.94 billion internationally, despite significant currency translation headwinds. Even with the modest sales beat, the bottom-line outperformance was primarily driven by better cost management as operating expenses were down considerably from the prior-year level, giving way to a nice margin improvement.

       The Pharmaceuticals business continued to be the company’s best performer, reporting a 5.1% sales increase, following a 1.3% hit from foreign currency translation, with oncology drugs leading the charge. Psoriasis treatment Stelera was another standout performer, boasting a near 30% jump in sales. The Medical Device unit’s operational sales rose 5.3% to $6.38 billion, driven by electrophysiology products, Acuvue contact lenses, wound closure products for surgery and trauma products for orthopedics. The company’s Consumer segment sales were up 1.3% to $3.47 billion, aided by Neutrogena beauty products and Tylenol over-the-counter painkiller sales. The gain was offset by lower sales in baby care.

       Management upped its expectations for the full year. It now looks for share-earnings growth of between 5.4% and 6.0%, up from its 4.3%-5.5% assumption. Too, the top-line growth forecast now stands at 0.2%-0.7%, up from its earlier call for sales to be flat to down 1%. Margin improvement and the likelihood of ongoing share repurchases should result in a solid bottom-line growth in the coming quarter and next year.

       The company continues to receive unfavorable news on the legal front (talc, opioid and Risperdal) and the investment community remains concerned. Nonetheless, these shares hold decent total-return potential out to early next decade with its generous 2.9% dividend yield, but prospects are highly speculative given the uncertain legal issues that remain. JNJ has robust finances, but only the more aggressive income investors will want to consider this stock until there is more clarity on the situation.

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