By Craig Bowles
Johnson & Johnson (JNJ) is slated to report 4Q 2014 earnings before the bell on Tuesday, January 21. The earnings release is expected at approximately 7:45 a.m. EST with a conference call to follow at 8:30 a.m. that is webcast through investor.jnj.com . A member of the Dow Jones Industrial Average, J&J has significant market influence and the potential to impact the broader market gauges. Also note that no other major companies report at the same time as J&J, making the trade signal relatively clear.
Outliers & Strategy
The current Street estimate is $1.20 (Source: Yahoo! Finance).
Revenues: Revenues are seen rising 2.2% y/y to $17.95 bln.
Earnings guidance for full-year 2014 is expected in the 4Q release and will compare to a current Street estimate is $5.86.
Even in the wake of the recent run-up, J&J shares are yielding 2.80%, limiting potential downside. Note that the industry norm is about 3.0% and J&J's 5-year average is 3.2%, suggesting investors with an appetite for yield may begin turning elsewhere with the shares at these levels.
J&J shares are up just over 10% (14% for sector) since the early October low and now trade at 21.1x trailing earnings, well above the 5-year average of 17x. The shares haven't trended since the high last summer after 2012's huge first half and a $1bln acquisition of Aragon Pharmaceuticals.
J&J shares tend to see minimal movement off earnings, with the 1-day average price change on earnings of just 1.3%. However, the index futures are more apt to be impacted by surprising results from J&J given its stature and influence in the marketplace.
- 01/09: Jefferies upgraded J&J to Buy from Hold noting valuation only shows a 2% PE premium on 2015E estimates and strong growth driven by new product launches, according to a post on StreetInsider.com.
- 01/07: RBC Capital Markets upgraded J&J to Outperform from Sector Perform based on improving operating margin leverage over the next three years, according to a post on Benzinga.com.
J&J shares ran back up into the lows $90s off the early October lows as the healthcare sector became a market leader. After rising 34% in 2013, the stock is close to a multi-year high ahead of Tuesday's earnings release. The Relative Strength Index (RSI) and MACD suggest the stock is not overextended. Recent consolidation shows a balance between $94.00 and $95.50, suggesting the stock could offer a nice trading opportunity in either direction. Should earnings fail to meet the high end of Street estimates, there is downside risk to the 20-Day and 50-Day SMA's near $93.00 with previous consolidation down to $91.00. Conversely, resistance is just below the $96.00 high. (Chart courtesy of StockCharts.com)
J&J shares have found more resistance in the low $90s in recent months, but are trading just off a multi-year high, thanks in part to a series of new treatments in the pharmaceutical space, an attractive dividend yield, and a stronger product portfolio. Given the recent strength, the Street will focus on the outlook for 2014. Expectations are high for this year and any missteps or downward adjustments to the forecast could weigh heavily, both on J&J shares, as well as the broader market indicators.
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