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Johnson & Johnson (NYSE:JNJ), the healthcare giant with a significant presence in consumer, pharmaceutical and medical devices, reports 4th quarter 012 financial results before the opening bell on Tuesday, January 22nd.

Analyst consensus is looking for $1.17 in earnings per share (EPS) on $17.67 billion in revenue, for expected year-over-year (y/y) growth of 9% and 3.5%, respectively.

Analyst estimates have remained relatively stable since the October earnings report, where management raised the low end of the guidance range for 2012 to $5.27 - $5.32 from $5.25 - $5.32 (excludes forex).

Assuming 2012 comes in as expected, full year revenues and EPS of $67.31 billion on $5.09 in earnings represents 3.5% and 2% growth for the healthcare giant.

Last quarter, JNJ reported its best organic revenue growth of in many years, coming in +5%. (According to our internal spreadsheet, JNJ grew Q3 '12 revenues 9%, the highest overall growth since our data started, which was early 2009.) The turnaround is being led by the pharma segment and the Synthes acquisition. As per a research note out of Deutschebank's Kristen Stewart, JNJ has launched 8 new products since 2009, with more in the pipeline. The pharma segment has ranged from 35% to 40% of JNJ's total revenue since late 2007. Pharma's organic revenue growth was +9% in Q3 '12, its first quarter of upside performance for the segment in some time.

The Synthes acquisition is interesting as well. The stock bottomed in early June near $62 per share, when JNJ announced that the Synthes acquisition would be financed somewhat differently - i.e. overseas custodied cash (of which JNJ has quite a bit) would be used to repurchase/acquire shares through JNJ's Irish subsidiary. The effect of this change would then make the Synthes acquisition highly accretive to the tune of $0.10 - $0.15 to JNJ's total earnings in 2013.

Whatever the reason, JNJ's share price found game on the Synthes acquisition and unusual financing, and hasn't looked back since.

JNJ is a classic turnaround situation, with the new CEO Alex Gorsky, replacing Bill Weldon. While Weldon was considered a decent CEO, he apparently fell asleep in 2009 - 2010 when all the recall issues hit the Tylenol brand via the McNeil manufacturing unit, and that unit suffered recall after recall, and a significant dent in brand image.

Gorsky, the new CEO, is coming on at the right time, as there is continued upside in the pharma, and consumer segments if the company can get the manufacturing issues remedied, and Medical Device and Diagnostics ((NYSEARCA:MDD)) growing once again.

Each of JNJ's segments should be able to grow their revenues at high-single-digit organic growth rates for an extended period of time, which should - given JNJ's operating leverage - be able to generate consistent 12% - 15% earnings growth over an extended period.

YearRev growthEPS growthP.E
2015 (est)5%8%11(x)
2014 (est)5%7%12(x)
2013 (est)7%8%12(x)
2012 (est)3%1%13(x)
20116%5%14(x)
2010-5%3%14(x)
20091%2%15(x)
20084%10%15(x)
200715%10%
20066%7%
2005 14%
2004 15%
2003 19%

Segments by revenue:

* Consumer 20% - 25% of total revenues since mid 2007

* Pharma 36% to 40% of total revenues since mid 2007

* MDD - 35% to 40% of total revenues since mid 2007

In addition, JNJ has a rock-solid credit rating and a fortress balance sheet, with ample cash-flow and free-cash-flow generation. Throw a share buyback and a very healthy dividend into the equation, and JNJ is a growth stock in waiting.

Qtr endTTM CFOTTM FCFFCF yield
9/12$15.5 billion$12.67%
6/12$15.6$12.77%
3/12$14.8$11.87%
12/11$14.3$11.46%
9/11$14.7$127%
6/11$15$12.47%
3/11$15$12.67%
12/10$16.4$148%
9/10$17.8$15.69%
6/10$17.9$15.89%
3/10$17.4$15.18%
12/09$16.6$14.28%
9/09$16.5$13.88%
6/09$16.4$13.59%
3/09$16$139%

* Source - cash flow data from 10-Q and internal spreadsheet. Free-cash-flow yield calculation is from internal spreadsheet.

* TTM CFO - is trailing twelve month cash-from operations

* TTM FCF - trailing twelve month free-cash-flow

* FCF yield - free-cash-flow yield

JNJ currently sports a 7% free-cash-flow yield (4-quarter trailing free-cash divided by market cap) and is trading at 14(x) the 2012 and 2013 current estimates of $5.09 and $5.40 for expected 7% growth in 2013.

The key hook to the fundamental story to JNJ is that the company has suffered through almost 5 years of sub-par low to mid single digit earnings growth, but is capable of far better. The current price doesn't discount the recovery fully yet in our opinion. If and when JNJ gets all the divisions running properly, the company should generate $20 billion in cash-flow annually with 50% to 75% of that being free-cash-flow.

Technically the stock traded to an all-time high this morning, but with earnings so close, and the stock overbought technically, we wont add to our current position in size, until we get a pullback in the stock.

We'd buy more on a pullback to the high $60s.

Disclosure: I am long JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Johnson & Johnson Earnings Preview: The Turnaround Continues, Led By Pharma

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