Johnson & Johnson: Another Win Added To The Earnings Season

| About: Johnson & (JNJ)

Summary

JNJ reported a 2.4% increase in its consumer segment revenue, led by a 9% rise from over the counter drugs, including Tylenol.

Rebuilding the consumer division’s cash cow status could add $500 million or more yearly to the operating profit.

The company is aggressively trying to cut down on its travel and meeting expenses that have continued to grow out of line with its revenue.

Pharmaceutical business posted a staggering increase of 21% in its quarterly sales revenue on the back of strong drug sales of Olysio, Remicade, etc.

Bringing Sandra Peterson to turnaround the failing McNeil Consumer Healthcare division of Johnson & Johnson (NYSE:JNJ) has proven quite fruitful for the company. Although her strategic moves may have sounded abrupt at the beginning, they turned out to be right, i.e. the withdrawal of several brands from the market while reintroducing three previously abandoned products like the pain killer, Tylenol. Back then, the recalls had not only cost the company $1.6 billion but also a chunk of the market share. At the same time, the company was facing difficulties in financing the retooling of a plant in Fort Washington, PA.

Revival Of The Consumer Business

Source: Wall Street Journal

Peterson concentrated her efforts on improving the quality of the products, introduced new systems and procedures to make sure the quality controls were being implemented. The company has focused on making improvements in the quality management process. A program has been initiated that uses various measures to check the performance of all consumer products. The consumer division is now mainly stressing on 11 major brands. In the US region, analgesic sales have increased by 25% as Tylenol and Motrin once again entered the market. After years of poor performance that began after JNJ picked up Pfizer's (NYSE:PFE) consumer business in 2006, this time JNJ reported a 2.4% increase in its consumer segment revenue, led by a 9% rise from over the counter drugs, including Tylenol, during the second quarter of the fiscal year 2014.

According to Jeff Jonas, a portfolio manager at Gabelli Funds in Rye, New York, "Rebuilding consumer's cash cow status could add $500 million or more yearly to the operating profit, important when J&J faces new growth challenges ahead". This can translate into a minimum benefit of 18 cents on a per share basis.

The consumer segment carries immense importance for JNJ and garners nearly $75 billion in revenue for JNJ on a yearly basis. The other two major segments of drugs and medical devices also rely on discovering breakthrough formulas and getting regulatory authorizations.

Sluggish Growth In Devices Segment

JNJ acquired Synthes to gain a major leadership position in the global surgical devices market, particularly for traumatic injuries and fractures. The integration is almost complete and the company expects the cost savings to increase. Apart from this, the company is aggressively trying to cut down on its travel and meeting expenses that have continued to grow out of line with its revenue. Therefore, JNJ has announced to eliminate all travel except for its sales force in an attempt to reduce these costs by 25% and meet its financial target of 2014. The company is also cutting down its head count to manage costs.

The company witnessed a meager increase of 0.7% in its quarterly revenue from this segment primarily due to the slump in the medical device business. Device makers are constantly struggling with the elevating costs and risks of making new products, intensifying pricing pressure, lower number of procedures and hospital admissions, and cost cutting hindrances posed by hospitals due to the implementation of the Obamacare Health Care Act.

Pharmaceutical Business

The pharmaceutical business of JNJ posted a staggering increase of 21% in its quarterly sales revenue on the back of strong drug sales. The company's combination Hepatitis C drug, Olysio, raked in $725 million in revenue for the quarter as compared to $354 million in the corresponding quarter last year.

The company's immunology portfolio experienced a growth of 17.4%, contributing $2.6 billion in total revenue. The double digit growth was achieved on the back of higher sales of Remicade in the US.

Oncology performed robustly on the international front and registered a year-over-year growth rate of 25.5%, bringing in quarterly revenue of $1.11 billion. On the contrary, neuroscience drugs witnessed a dip in growth and posted revenues of $1.6 billion, representing a year-over-year decline of 3.2%.

Source: Bidness Etc

Based on the strong results delivered during the second quarter, specifically for Olysio, the company has upgraded its full-year earnings guidance to $5.85-$5.92 per share, whereas analysts have anticipated the EPS at $5.90 per share.

Final Verdict

In the wake of the turnaround brought about by measures implemented by Peterson and strong performance of its blockbuster drug Olysio, JNJ has a bright future outlook and is well positioned for registering further increases in its top and bottom line. Therefore, I recommend buying the stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.