Johnson & Johnson (JNJ) is one of those large global companies with looks that can be a bit deceiving right now. After a large spike in July, it appears the stock is holding its own. Can it continue to move up? Let's take a look at how the stock has performed as of late and the outlook on it for the end of the year.
Funds Managers Love Its Defensive Design
Johnson & Johnson is a proven stalwart among analysts as a defensive stock to sit tight with in hard economic times. Moore Capital Management LP added shares of Johnson & Johnson while selling Apple Inc. (AAPL) in the second quarter. Investment funds are moving away from stocks that are tied to economic growth and moving into more defensive minded stocks "least" tied to economic growth. JNJ had the largest movement into the stock by money managers signifying some fund managers still had faith in the stock, despite the ongoing conflicts it has faced. Here is a large global company not tied to a growing economy, but selling consumer products bought and used over and over.
One reason fund managers still have faith in the company is because of its diversity. I believe these funds are taking up a defensive position. The strategy is for minimal loss, instead of looking for growth. Firms like JNJ, less sensitive to changes in the economy, were the only industries to gain during the quarter. Even though it still faces headwinds from pricing pressures, healthcare reform and manufacturing issues, its diversification makes it almost immune to cyclical movements and will help it weather tough economic times.
Berkshire Says it Won't Grow
Berkshire dropped a lot of its interest in Johnson & Johnson by getting rid of two-thirds of its holdings in the company. Mr. Buffett is of the opinion that, despite the diversity and nice looking balance sheet, the company has just been too sloppy. The $1.1 billion fine is looming over its head after the Arkansas jury said the firm misled doctors and patients about the risks of antipsychotic medication Risperdal. At the same time, it struggles through the recall of artificial hip implants and over-the-counter medicines. Berkshire believes the company's profitability will be in question for some time until these numerous infractions clear up.
Drug Problems Just Will not Go Away
Johnson & Johnson is coming to term with investigations into Risperdal and marketing allegations related to two other drugs - antipsychotic drug Invega, and heart drug Natrecor. There will be a deal that some sources have pegged at $2.2 billion. As that is ending, the U.S. Justice Department demanded Doribax marketing information in April. Like Risperdal, Doribax has been tagged with safety questions. The drug isn't approved as a pneumonia treatment even though it has been used for such; its FDA-approved indications are in urinary-tract and abdominal infections.
JNJ Outlook gets Smaller, but It's Doing better than the Numbers Show
Johnson & Johnson was no different than the majority of companies this quarter, as it posted second quarter 2012 earnings that beat consensus by a penny, but fell just shy of revenue expectations. So the company was average. This is what is interesting about Johnson & Johnson's numbers. It had a favorable sales increase of 3.5%, but currency fluctuations created a negative impact of 4.2%. This also includes the additional income from its Synthes acquisition.
International sales (where the company had the most growth) was in the same boat. It had 7.1% operational growth, but a negative 7.5% impact because of currency. Here's the point I am trying to make - Johnson & Johnson's core business and growth were pretty solid. The unfavorable foreign exchange rates have masked the fact that the core performance and growth were largely solid.
As expected (like most companies), JNJ cut its outlook for 2012. This is no surprise. The new guidance mainly reflects the negative impact of currency fluctuation, partially offset by the positive impact of the Synthes acquisition. If it wasn't for the currency fluctuation, the company's numbers would look outstanding. This is a strong case for Johnson & Johnson to stay up where it is with the base it has built.
Higher in 2013?
Johnson & Johnson is well diversified in terms of its markets, and I have stated that most of its sales come from outside the United States. As this growth continues, it will have to wrestle with currency fluctuations. The only way to compensate for this is by sales volume. The company has already cut back on expenses and even though margins may be a little low, the company's bottom line will not be affected. I believe the company is much better than the numbers show. I see a strong 2013 for this company, but it will have to deal with currency problems.