Johnson & Johnson (JNJ) reported mixed results on Tuesday that showed strong top-line expansion but relatively flat earnings growth due to higher marketing costs and missteps that led to product recalls. We don’t see any reason to change our $83 fair value estimate at this time.
J&J’s top line jumped nearly 7%, led by international revenue, which skyrocketed over 16% during the period (roughly half of that organic, with the balance being currency). International pharmaceutical revenue jumped an impressive 27% in the period. Domestic sales, however, were pretty weak across the board: domestic consumer sales fell about 4.5%, domestic pharmaceutical sales fell over 6%, while domestic medical-device sales dropped nearly 1%.
As expected, domestic pharma sales were hurt by generic competition for Levaquin (a treatment for bacterial infections), the sales of which dropped precipitously in the quarter. US sales of Doxil also fell sharply in the period. However, we’re quite bullish on the long-term prospects of other drugs, including Zytiga (a treatment for prostate cancer that received marketing approval from the European commission during the quarter), Stelera (a treatment for plaque psoriasis), and Simponi (a treatment for rheumatoid arthritis). Worldwide sales of Stelara jumped nearly 90% in the period, while sales of Simponi more than doubled from last year’s quarter.
Excluding special items (including costs related to the acquisition of Synthes), earnings increased a mere 0.8%, to $1.24, about in line with what we were expecting. The firm also updated its full-year 2011 bottom-line guidance and now expects diluted EPS, ex special items, to reach $4.95 per share on the low end (the low end had been $4.90 previously). Management maintained the high end of the range at $5 per share, a mark we think is achievable, but only if currency cooperates (currency was a rather large tailwind during the period, and it’s likely it will reverse during the current period).
All in all, we’d consider adding J&J to the portfolio in our Best Ideas Newsletter if shares fell below $62 (the low end of our fair value range).