Johnson & Johnson - Solid Quarter For This Well-Led Diversified Healthcare Conglomerate

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Johnson & Johnson (NYSE:JNJ) opened its books for the fiscal year of 2013. The pharmaceutical giant had a solid end to the year and while the guidance for earnings in 2014 is a bit soft, the long term prospects for the pharmaceutical giant remain rock solid.

Fourth Quarter Headlines

On Tuesday, Johnson & Johnson announced fourth quarter revenues of $18.36 billion. This is up 4.5% on the year before, despite adverse currency movements which shaved off 1.8% of total sales. Revenues came in comfortably ahead of consensus estimates at $17.95 billion.

The firm reported 37.1% earnings growth, with earnings coming in at $3.52 billion. Earnings rose from $0.91 to $1.23 per diluted share, coming in at $3.52 billion. On an adjusted basis, earnings came in at $1.24 per share. This is up five cents compared to last year, and is four cents ahead of consensus estimates.

Looking Into The Numbers

US sales rose by 7.4% to $8.01 billion on an annual basis. Reported international growth was 2.4%, but sales rose by 5.6% excluding currency movements.

The consumer business reported 2.8% headline growth with revenues coming in at $3.75 billion. Growth was the strongest at the pharmaceutical business which reported 11.8% growth to $7.30 billion as medical devices and diagnostic revenues fell by a percent to $7.31 billion.

The company made huge gross margin expansion with cost of goods sold falling by 170 basis points to 32.5% of total revenues. These gains were offset by a 160 basis point increase for in-process research and development expenses. As a result of other expenses, which totaled $868 million, operating earnings fell by 11% to $2.75 billion.

The only reason why net earnings rose was the result of a $769 million tax benefit, instead of a typical provision.

Portfolio Optimization

Johnson & Johnson continues to focus on its portfolio management, announcing that it has received a binding offer for the Ortho-Clinical Diagnostics business. Johnson & Johnson was not a market leader within the segment, and it therefore decided to put the business for sale.

For a sum of $4.15 billion the business will be acquired by The Carlyle Group if Johnson & Johnson accepts the offer. The acceptance period will end on the end of March of 2014, and when approved the deal could be closed in the middle of the year.

Note that the reported deal tag hardly makes a dent in Johnson & Johnson's operations, making up just 1.5% of the market capitalization.

2013 Review And Looking Ahead

Full year revenues for 2013 came in at $71.3 billion which was up by 6.1% compared to the year before. Excluding currency movements growth was 7.7%. Adjusting for the impact of acquisitions and divestitures, reported top-line growth was 5.2%.

Reported earnings came in at $13.8 billion, while adjusted earnings totaled $15.9 billion. Adjusted earnings per share came in at $5.52 per share, up by 8.2%. For 2014, the company sees earnings of $5.75 to $5.85 per share, implying earnings are set to rise between 4 and 6%. Analysts were looking for earning of $5.86 per share for the current calendar year.

Implications Going Forwards

Johnson & Johnson did not provide a balance sheet yet, but the company ended the third quarter with a net cash position of roughly $10 billion. With access to $25 billion in cash and equivalents, on top of which come the proceeds from the sale of the Ortho-Clinical Diagnostics business, the firm has great financial resources available.

After focusing on the integration of Synthes the business is poised for growth, possibly fueled by merger and acquisition action in the new year, or higher buybacks. This is especially true as top line growth might be under pressure.

The earnings outlook for 2014 is a bit cautious as one of the latest blockbusters Xarelto has failed to get approval from the FDA to expand approval for patients with chest pains or mild heart attacks.

Takeaway For Investors

After backing out the net cash position of the business, Johnson & Johnson trades at roughly 15-16 times adjusted earnings for 2014. Note that these are adjusted earnings, while GAAP earnings are structurally lower. As such, shares trade around 19 times GAAP earnings which is not cheap.

Yet the firm's strategy, diversification and track record is unmatched. Notably the pharmaceutical business, driven by immunology and oncology sales have performed really well. Combined with a focus on R&D, new product and drug introductions and growth, the firm has a strong track record. Add to that the $0.66 quarterly dividend, and investors receive a cool 2.8% dividend yield on top of that. This is even as shares have already risen by 30% over the past year.

Despite the slight shortfall in the 2014 earnings guidance, the company remains a cornerstone in any growth and dividend oriented investment portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.