Johnson & Johnson Approaching All-Time Highs Headed Into Q2 2012 Earnings

| About: Johnson & (JNJ)

By Brendan Gilmartin

Johnson & Johnson (JNJ) is slated to report 2Q 2012 earnings before the bell on Tuesday, July 17. The earnings release is expected to come though at approximately 7:45 a.m. EST with a conference call to follow at 8:30 a.m. 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

Key measures:

  • Adjusted Earnings Per Share & Earnings Per Share Excluding Items: The values for both measures are typically the same and are comparable with consensus estimates. The current Street estimate is $1.29 (source: Yahoo! Finance).
  • NOTE that on 6/8, J&J disclosed plans for a $600mln charge related to legal matters. EPS Ex-items is therefore more likely to be the comparable value.
  • Revenue: Revenue is seen rising 0.7% year/year to $16.72 bln.
  • Adjusted Earnings Per Share Guidance / Earnings Per Share Guidance (FY2012).
  • Back in April, J&J announced adjusted earnings guidance for full-year 2012 of $5.05 to $5.17 per share.
  • Adjustments to this outlook could have a profound impact on the index futures and the underlying shares.
  • Johnson & Johnson is the first of the major pharmaceutical companies to report quarterly results and could impact the likes of Pfizer (PFE), Merck (MRK), Abbott Labs (ABT), and Bristol-Myers Squibb Co. (BMY).

Recent News

  • 06/13: According to a report on Barron's Online, JP Morgan upgraded J&J from Neutral to Overweight and raised the price target from $69 to $74. The report cited the takeover of Alex Gorsky as CEO, nearly 4% dividend yield, and sum-of-the-parts valuation.
  • 06/13: Jefferies upgraded J&J from Hold to Buy and raised the price target from $68 to $72, according to a post on Benzinga. The upgrade was based on the accelerated share repurchase program and favorable impact to earnings announced mid-June.
  • 06/12: J&J announced it now expects the $19.7 bln acquisition of Synthes, Inc. (closed 6/14/2012) to be accretive to 2012 earnings, thanks to an accelerated share repurchase program. The prior expectation was for a loss of $0.22.
  • 06/08: J&J expects to incur a special charge in the 2Q of approximately $600 million for legal reserves related to the previously disclosed litigation matters related to RISPERDAL® (risperidone), INVEGA® (paliperidone), NATRECOR® (nesiritide) and Omnicare.
  • 04/26: J&J declared a 7.0% increase in the quarterly dividend to $0.61 per share. The shares are now yielding 3.60%.

Technical Review

J&J shares recently broke out to a four-year high, making it among the top-performing names in the Dow 30. In light of this strength, there is no near-term resistance. However, the Relative Strength Index (RSI) is now well above 70 - a level considered overbought, while the MACD is also a bit extended. If earnings fail to meet lofty expectations, there is downside risk to support at $66.50 (April high), followed by the 50-Day SMA near $65.00.

(Chart courtesy of StockCharts.com)

Click to enlarge

Summary

J&J shares are near an all-time high headed into the 2Q 2012 earnings release, stemming from optimism regarding the leadership of newly minted CEO Alex Gorsky, an accelerated share repurchase program in mid-June, a solid 3.6% dividend yield, and valuation. Technically, however, the shares look to have priced in much of the positive news after rising close to 10% since mid-June, while several technical oscillators are registering overbought conditions. Ongoing legal issues from the past several years and talk of a worldwide economic slowdown are additional concerns. Guidance for the balance of the year will be the focal point given recent strength.

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

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