Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of Johnson & Johnson (JNJ) rose almost 6% over the past week. The diversified healthcare company focused on pharmaceuticals, medical devices and diagnostics reported its third quarter results on Tuesday.

Third Quarter Results

Johnson & Johnson reported third quarter revenues of $17.1 billion, up 6.5% on the year before. Revenue growth was driven by the acquisition of Synthes which added 5.8% in revenues. Revenues came in slightly ahead of analysts consensus of $16.9 billion.

Net earnings attributable to Johnson & Johnson fell 7.3% to $2.97 billion, or $1.05 per diluted share. Earnings were impacted by a $553 million after-tax charge related to the discontinuation of the phase 3 clinical development of Bapineuzumab IV, and integration costs related to the acquisition of Synthes.

Excluding these charges, adjusted net earnings came in at $1.25 per share, up a penny on the year before. Adjusted earnings comfortably beat analysts consensus of $1.20 per share.

CEO Alex Gorsky commented on the results, "Our third-quarter results reflected continued sales momentum driven by strong growth of key products, successful new product launches, and the addition of Synthes to our family of companies. We advanced our pipelines with regulatory approvals for a number of new products, the submission of several new drug applications, and the completion of several strategic collaborations."

Segmental Information

Consumer

Revenues in the consumer division fell 4.3% to $3.58 billion, as a result of currency headwinds. US sales fell by 0.4% to $1.21 billion, while International sales fell by 6.1% to $2.37 billion. In constant currencies, International sales were up 1.8%. Notably, sales of upper respiratory over-the-counter products, sales of Listerine and Neutrogena skin care products performed well.

Pharmaceutical

Revenues for the pharmaceutical division rose 7.0% to $6.40 billion. The US division reported a 14.6% increase in revenues to $3.29 billion. International sales came in unchanged at $3.11 billion, but were up 8.2% in constant currencies. Strong contributors to sales were Remicade, Prezista and Velcade, among others.

Med Devices & Diagnostics

The medical devices and diagnostics division performed very well as revenues rose 12.5% to $7.07 billion. US revenues rose by 18.3% to $3.29 billion, while international revenues rose 7.9% to $3.78 billion. In constant currencies, international revenues rose by 14.4%. The growth of the division was entirely driven by the acquisition of Synthes which added 14.4% in total revenues.

Outlook

The company updates its full year 2012 earnings outlook to $5.05-$5.10 per share. This excludes the impact of special items.

Valuation

Johnson & Johnson did not provide investors with a consolidated balance sheet for the third quarter. Johnson & Johnson ended its second quarter with $16.9 billion in cash and equivalents. The company operates with $17.6 billion in short and long term debt, for a modest net debt position of roughly $700 million.

For the first nine months of 2012, Johnson & Johnson reported revenues of $49.7 billion. The company reported net earnings attributable to shareholders of $8.3 billion, or $2.96 per diluted share. At this rate, the company could generate revenues of $67 billion. The company is on track to earn around $11 billion for 2012, or $4.00 per diluted share for the year.

The market currently values Johnson & Johnson at $198 billion. This values the firm at 3.0 times annual revenues and 18 times annual earnings.

Currently, Johnson & Johnson pays a quarterly dividend of $0.61 per share, for an annual dividend yield of 3.4%.

Investment Thesis

Year to date, shares of Johnson & Johnson have risen some 10%. Shares started in January at $65 and fell to $62 in June. Shares jumped up after the company announced the completion of the $20 billion acquisition of Synthes, and are currently exchanging hands at $72 per share, the highest level of 2012.

Over the past five years, shares trade with modest gains of 10%. Shares traded between $50-$70 for the entire period. In fact, shares traded roughly within this tight range for most of the past decade. Between 2008 and 2012, the company modestly grew its revenues from $63.7 billion to an expected $67 billion in 2012. Net income fell from $12.9 billion to an expected $11.0 billion over the same time period.

Despite the fact that Johnson & Johnson pays an excellent dividend yield of 3.4%, the company manages to save up some cash to make occasional acquisitions. Last year, the company announced the $20 billion acquisition of Swiss-based Synthes, which adds about $4 billion in annual revenues.

After the deal, Johnson & Johnson operates with a net debt position close to zero, giving the company enough ammunition to make future acquisitions, raise dividends, or repurchase more shares. After paying out a decent quarterly dividend, cash still flows in at a rate exceeding $1 billion per quarter.

Johnson & Johnson is an excellent investment for a long term investor looking for a decent dividend yield in a diversified portfolio.

Source: Johnson & Johnson: High Dividend Yield, Strong Capital Position