North America

Earnings Preview: Johnson & Johnson Q2 2017 (JNJ)

By: Craig Bowles

Overview

Johnson & Johnson (JNJ) is slated to report 2Q 2017 earnings before the opening bell on Tuesday, July 18th. The earnings release is expected at approximately 6:45 a.m. ET with a conference call to follow at 8:30 a.m. that is webcast through J&J investor relations. A member of the Dow Jones Industrial Average, J&J has significant market influence and the potential to impact the broader market gauges.

Outliers & Strategy

Key measures:

  • Adjusted Earnings Per Share (EPS) & Earnings Per Share (EPS) Excluding Items: The values for both measures are typically the same and are comparable to consensus estimates. The Street estimate is $1.80 (range $1.74 to $1.86). (Source: Yahoo! Finance)
  • Revenues: Analyst consensus expectations are to increase 2.6% y/y to $18.96 bln (range $18.65 bln to $19.28 bln).
  • Adjusted Earnings Per Share (EPS) Guidance (FY2017): Company sees $7.00 to $7.15. The Street estimate is $7.10.
  • Revenue Guidance (FY2017): Company sees $75.4 bln to $76.1 bln. The Street estimate is $75.66 bln.
  • J&J P/E of 22.2 compares to a 5-year average of 19.8; P/B of 5.1 compares to a 5-year average of 3.7; P/S of 5.1 compares to a 5-year average of 3.8; P/CF of 18.8 compares to a 5-year average of 16.4. Dividend 2.5% compares to a 5-year average of 2.9%.
  • Analysts view J&J with 8 (6 last qtr) Buy, 9 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • J&J insiders show no trades over the last three months and sold a net 270,757 shares in the past year. (source: NASDAQ.com) J&J authorized $10 billion stock buybacks in October 2015 and appears to have used it all.
  • J&J 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 (BMY).
  • J&J shares tend to see minimal movement off earnings, with the 1-day average price change on earnings of just 1.88%. Options are pricing in an implied move of 2.05% off earnings.

Recent News

  • 07/06: Wells Fargo maintained a Market Perform rating on Johnson & Johnson and notes the company could exceed sales expectations due to ATLN transaction closing 2 weeks ahead of schedule and reduced FX headwinds, according to a post on StreetInsider.com.
  • 06/13: Cowen reiterated an Outperform rating on Johnson & Johnson noting the CANVAS program’s integrated data analysis at the ADA Conference provided statistically significant lower cardiovascular event rate compared to the placebo. The positive result was crucial for Invokana competitive positioning, according to a post on StreetInsider.com.
  • 05/19: Johnson & Johnson is close to selling its Compeed blister cushion business for about $1 billion, according to a post on StreetInsider.com.
  • 05/17: The Food and Drug Administration confirmed an increased risk of leg and foot amputation with Johnson & Johnson’s diabetes drugs Invokana and Invokamet/XR and is requiring new warnings, including the prominent Boxed Warning, to be added to the drugs’ labels, according to a post on Barron’s.com.
  • 05/15: JPMorgan upgraded Johnson & Johnson to Overweight from Neutral citing that shares have underperformed the past 12 months on the prospect of decelerating top-line growth in 2017, owing to increased competition for the Pharmaceutical business. The deceleration thesis will, after the second quarter, have played itself out and over the next 6-12 months look increasingly stale, according to a post on Barron’s.com.
  • 04/18: Cowen contends that the “the need for the Actelion acquisition was highlighted by the 1Q’17 slow down, according to a post on Barron’s.com.

Technical Review

Johnson & Johnson made another all-time high in June at $137. Balance area support is $125 and then $116. The healthcare sector two-year smoothed growth rates have been slowing since March 2015 when the sector was the strongest with growth rates over 100. Historically, a sector would be expected to underperform through the next expansion after reaching such a high growth rate. (Chart courtesy of StockCharts.com)

Summary

Healthcare stocks lagged the Trump rally but have done better recently with the realization that change is unlikely. Analysts are more bullish on Johnson & Johnson and suggest the early closing of the Actelion acquisition could boost Q2 results. JNJ still has approximately $10 bln in cash, so some of that could be used for another stock buyback. The company has beaten estimates by an average of 4c the last four quarters. Estimize consensus for an adjusted EPS of $1.82 on revenue of $18.894 bln compares to analyst consensus of $1.80 on revenue of $18.96 bln. Any change in 2017 guidance would be of interest.

 

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