On Tuesday, Johnson & Johnson (JNJ) is scheduled to announce its third quarter earnings report and the pharmaceutical and consumer health care products giant is hoping to break a streak of revenue declines over the last two quarters along with net income declines over the past four quarters. Likewise, Wall Street has a mixed view on Johnson & Johnson with Goldman Sachs (GS) recently downgrading the stock from a "neutral" rating to a "sell" rating with a $72.00 price target in what was described as a valuation call (The company closed at $67.97 on the Friday before earnings and had last hit the $70 level on the eve of the financial crisis). On the other hand, Wells Fargo (WFC) reiterated it's "outperform" rating while analysts at Cowen (COWN) also reiterated an "outperform" rating. In addition, its also worth mentioning that the stock has a forward dividend of $2.44 for a dividend yield of 3.6% - not a bad return given today's near zero interest rate environment. Nevertheless, should Johnson & Johnson still be considered a growth stock with any growth left - especially after the upcoming earnings report?
The Numbers Wall Street Expects from Johnson & Johnson
According to the latest summary of analyst estimates from Yahoo! Finance, the Wall Street consensus expects Johnson & Johnson to report a 5.80% rise in revenue to $16.93 billion along with an EPS of $1.21 verses $1.24 for the same period last year. The current EPS consensus estimate of $1.21 is down from the $1.27 consensus number three months ago.
For the year, the Wall Street consensus for Johnson & Johnson calls for a 3.30% revenue decline to $67.17 billion while EPS is expected to rise from $5.00 to $5.06; and for next year, the Wall Street consensus expects a 7.40% revenue rise to $72.12 billion along with an EPS rise from $5.06 to $5.46. However, investors need to keep in mind that these Johnson & Johnson estimates from Wall Street for both revenue and earnings could still make big changes in either direction.
In addition, investors should also keep in mind that other pharmaceutical or health care stocks scheduled to report earnings include Abbott Laboratories (ABT) on Wednesday, October 17th; Bristol-Myers Squibb (BMY) and Eli Lilly (LLY) on Wednesday, October 24th; Novartis (NVS), Sanofi (SNY) and AstraZeneca (AZN) on Thursday, October 25th; and Pfizer (PFE) and GlaxoSmithKline (GSK) on Wednesday, October 31st.
What Johnson & Johnson Reported Last Earnings Season
The last time Johnson & Johnson reported earnings, it reported a slight revenue decline of 0.7% year-over-year to $16.47 billion that was blamed on a strong US dollar along with revenue declines in the consumer healthcare and medical device divisions that were only partially offset by a slight increase in sales for the pharmaceutical division. Net income when adjusted for non-recurring items actually grew 2.7% to $3.6 billion thanks to the company's cost-cutting efforts.
It's worth noting that currency fluctuations hit the consumer healthcare division the most as this division gets about two-thirds of its sales from international markets where it's on the front lines of any currency movement. In addition, the major revenue drivers for the pharmaceutical division were immunology drugs Remicade, Simponi and Stelara plus oncology drug Zytiga but the patent loss of anti-infective Levaquin/Floxin in June 2011 had outweighed any gains seen by Prezista - the company's other anti-infective drug.
What You Need to Listen For
This time around, investors will need to pay close attention to any management discussion about what is driving sales in Johnson & Johnson's pharmaceutical division. What you should be paying attention to includes sales trends for hepatitis C treatment Incivo along with other drugs verses the competition (which is increasing) as well as any progress on drugs currently in development like its hepatitis C drug TMC435 and canagliflozin for Type 2 diabetes. Likewise, there will likely be some charges for the recently announced failure of the second Phase III trial of bapineuzumab or "bapi," a treatment of Alzheimer's disease that Johnson & Johnson was developing jointly with Pfizer (Note: Two smaller Phase 2 studies will continue).
In addition, since September 2009, Johnson & Johnson has recalled at least 30 products with many still not yet back on store shelves while Doxil, an important cancer drug the company farmed out to a subcontractor only to have production shutdown last November because of contamination and lax quality controls, has yet to resume. That means the company is loosing out on a good deal of potential revenue plus it has been forced to spend $1 billion to rebuild one manufacturing facility and upgrade another to head off further problems.
Finally, the major criticism that has been directed at Johnson & Johnson is that while it remains focused on growth through acquisitions, many of its large cap peers or competitors are slimming down in order to try and generate more value for their shareholders. Thus far, there has been no indication from Johnson & Johnson's management that they intend to reverse course - something that Wall Street would like to hear. Hence, investors should listen to any signs of a change in direction and it should further be noted that the company will no doubt be incurring more charges to integrate its June $19.7 billion acquisition of Synthes - a maker of surgical trauma equipment plus orthopedic implants.
A Final Word About the Coming Johnson & Johnson Earnings Report
For conservative investors with a long-term time horizon, Johnson & Johnson will remain a sound investment no matter what the company reports on Tuesday as it's also part of the Dow Jones Industrial Average - meaning the stock needs to be in many fund and ETF portfolios plus its considered to be a bellwether for the health of the global economy. However, with that in mind, many growth orientated investors may also find plenty of better growth opportunities that could produce a greater return than Johnson & Johnson stock (even with its dividend yield of 3.6%) - especially given that the company seems to be focused on continuing its business strategy of growth through acquisition rather than finding ways to generate more value for investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.