Johnson & Johnson Share price: Healthcare Aristocrat Leads Recovery on Wall Street

Johnson & Johnson Share price: Healthcare Aristocrat Leads Recovery on Wall Street
Written by:
Veselin Valchev
24th October 2014

Johnson & Johnson (JNJ) enjoys a ratings boost on the back of strong quarterly reports!

Johnson & Johnson (NYSE: JNJ) is one of the most recognisable international companies. It is also one of the most successful and enduring companies. J&J is founded on 4 strategic principles, including the following: a strong focus on people and values, strategically managed operations, decentralisation, and a focus on human health.  General Robert Wood Johnson, chairman of J&J from 1932 to 1963 is credited with these core guiding principles. The 2008/9 recession wreaked havoc on the global economy, and Johnson & Johnson was not immune from the massive economic downturn that ensued. Owing to strategic leadership decisions, J&J focused on creating a more efficient enterprise, reducing infrastructure and costs and rethinking investments. The result was a highly innovative, dynamic and profitable business model.

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A big part of the focus at this giant is research and development. Some of the company’s most popular brands include the following products: Remicade, Zyrtec, Tylenol, Band-Aid, Listerine, Neutrogena, Topamax and many others. The CEO and Chairman is presently Alex Gorsky. The Q3 quarterly results at J&J have had a marked impact on ratings. After the earnings reports were announced, shareholders will receive $0.70 per share by December 9. This figure represents a dividend yield of 2.89% and an annualised dividend of $2.80 while Bank of America rated J&J shares as neutral, down from $106 to $99 on the stock, Credit Suisse upgraded J&J stock from underperform status to neutral status. They have a price of $110 on the stock, while Zacks have the stock at $104. Johnson & Johnson is currently trading at $98.70 per share on the New York Stock Exchange, and has a price-earnings ratio of 16.34 with earnings per share (EPS) of 6.04. The company’s market cap is listed at $278.36 billion as at October 20, 2014.

 

Johnson & Johnson Economic Performance – 2013 Annual Report Highlights

 

The 2013 Johnson & Johnson annual reports reflect operational growth of 12% (over and above 2012 figures), pharmaceuticals accounting for 39% of total sales, medical devices and diagnostics making up 40% of sales, with concomitant operational growth of 6.1 percentage points, and a 2.8% increase on the consumer segment which generated 21% of sales, over 2012 figures. J&J listed a free cash flow figure of approximately $14 billion for 2013. Shareholders were handsomely rewarded during 2013, with a total return close to 35%. This figure far outstripped every major financial index that the company benchmarks itself against. It is also one of just six companies in the S&P 100 to have recorded 51 years of consecutive dividend increases.

Johnson & Johnson is also a leader in over-the-counter products in the US marketplace. Two of its top brands include Motrin® and Tylenol®, both of which have enjoyed US over-the-counter market growth of 19.7%. Some of the most popular brands that are leading the way for the company include Johnson’s Baby®, Listerine® and Neutrogena®. The aforementioned products are among the most important consumer products for the company. J&J also successfully integrated DePuy Synthes Companies – an orthopaedics company – to transform healthcare delivery, with cross selling initiatives and cost saving synergies to allow for greater competition moving forward. Most importantly, Johnson & Johnson has launched a total of 13 products since 2009, with some of the top brands including REMICADE® and PREZISTA® for autoimmune diseases.

The goal for 2013 operational sales growth was 5.2%-6.2%, however the 2013 results reflected a 7.7% growth. Likewise the free cash flow of 2013 was estimated between $12.6 billion and $13.6 billion, and the actual 2013 results were $13.8 billion. Total adjusted operational Earnings Per Share (EPS) growth was estimated between 4% and 6%, but actual 2013 results were 7.8% EPS growth. During 2013, Johnson & Johnson managed to hold or gain market share in 14 of 18 product platforms. Further, J&J research and development initiatives accounted for strong growth over the past five years, with 25% of sales coming from such products.

Based on comparative reports from Johnson & Johnson’s executive peer group from 2013, J&J ranked 6th in terms of revenue, 4th in terms of net income and 2nd in terms of market cap. Johnson & Johnson revenue (December 31, 2013) was reported at $71,312 (millions), net income of $13,831 (millions) and a market cap of $266 billion. General Electric Company (GE) topped Johnson & Johnson in all three of those categories, but J&J was in the top six among its executive peer group.

How Johnson & Johnson Q3 2014 Earnings Boosted Wall Street

 

Year-on-year, Johnson & Johnson sales increased 5.1 percentage points to $18.5 billion. The third-quarter earnings per share (EPS) listed at $1.66. With the exclusion of special items, 2014 Q3 EPS of $1.50 had increased by 10.3%. Additionally, there was a 5.8% operational results increase and the negative effects of the currency cross rates was listed at 0.7%. While international sales decreased by 0.3%, domestic sales increased by 11.6%. This led to an overall operational growth rate of one percentage point with a 1.3% negative currency impact. Diluted earnings per share and net earnings for Q3 2014 were $1.66 and $4.7 billion respectively. Johnson & Johnson made a strategic decision to divest from Ortho-Clinical Diagnostics, and it reaped a post-tax net gain of $1.1 billion. When compared to Q3 2013, the present quarter’s earnings reports show an increase of 9.5% and 10.3% in current quarter earnings and diluted earnings per share respectively.

According to the CEO and chairman of Johnson & Johnson, Alex Gorsky, ‘…our strong third-quarter performance reflects the continued success of our new products and the strength of our core business. We are making deliberate portfolio choices, positioning us well for achieving our near-term priorities and our long-term growth drivers…’ As a result of current performance, Johnson & Johnson has increased its earnings guidance for 2014 to $5.97 per share (up from $5.92 per share).  While the company has enjoyed many successes in Q3 2014, there has been a marked slowdown in several key markets. Global sales were $3.6 billion for Q3, a 0.6% decline from 2013.

Domestic sales also decreased by 4.2 percentage points while international sales improved by 1.3%. This represented an overall operational increase of 2.6% with negative cross-currency exchange rates accounting for a 1.3% currency impact. Worldwide medical devices and diagnostics sales figures declined by 5.2% (versus 2013), with a sales figure of $6.6 billion. Both international sales and domestic sales decreased in this sector. An overall operational decrease of 2.8 percentage points was recorded. On the positive side, OTC products like Listerine® powered consumer sales for Johnson & Johnson. During Q4 2014, Johnson & Johnson’s acquisition of Alios BioPharma Inc will be completed, for which a cash price of $1.75 billion has already been paid.

How Johnson & Johnson’s Q3 Figures Came to Be

 

Following the announcement of Q3 2014 results, Johnson & Johnson’s share price dipped slightly, despite the fact that actual results were better than forecasts. One of the main drivers of less than optimal performance for Johnson & Johnson was in sales figures generated by Olysio. Heavy competition from Gilead Sciences in the form of its branded drug Sovaldi, cut deep into Johnson & Johnson’s profitability. However there was an improvement in diabetes drug sales, but the market is largely focused on the poor performance of Olysio. Since the company is about to face increasing competition with the expiration of several key patents, the performance of this existing drug is cause for concern. Since 2012, the pharmaceutical business has largely been responsible for the solid performance of J&J stocks. This Hepatitis C drug sold $831 million in Q2 2014, but it has already generated $1.98 billion from January through September 2014. Without this drug, J&J’s pharmaceutical growth was 6.8%, year-on-year, but when that drug is included, that figure swells to 18.1%. The below graphic represents sales of Olysio during each of the quarters in 2014notice the declining contribution between Q2 and Q3.

 

Other strong performers for Johnson & Johnson during 2014 include the cancer drug Zytiga. Again, a rival medication is now cutting into J&Js profits in the form of Xtandi. This drug was approved in September 2014 for patients who had already been receiving chemotherapy. Of equal concern to J&J is the loss of its European patent on Remicade in 2015. This drug is used for the treatment of rheumatoid arthritis, and the EU wants to push through a much cheaper substitute for patients. In terms of overall pharmaceutical revenues for J&J, Remicade accounts for 25% of sales.

Future Money Spinners for Johnson & Johnson

 

Diagnostics and medical devices have generated a varying mix of profitability for Johnson & Johnson. The EBITDA margin moved from 45% (2007) to 53% (2010). This was largely the result of a favourable product mix, net gains from lawsuits, and improved manufacturing efficiencies among others. By 2011, there was a nine percentage point drop, owing to legal expenses, product liability and the recall of DePuy Hip. By 2012 the margins were positive again, spiking to 57.5%, largely on the back of higher profitability from Synthes’ sales, lower legal expenses and product liability issues. It is also expected that Johnson & Johnson will file many new products and line extensions moving forward. One such drug that has been approved is INVOKANA (canagliflozen). But J&J will also be losing patents in the coming years and it will need to accelerate the development of new drugs. Banc De Binary analysts believe that the biggest threat to a company like Johnson & Johnson is the emerging market economy. Generic medications cost a fraction of the drugs produced in first world countries. This is a serious threat to the long-term sustainability of the pharmaceutical wing of companies like Johnson & Johnson.

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