North America

Earnings Preview: Johnson & Johnson Q3 2015 (JNJ)

By: Craig Bowles

Overview:

Johnson & Johnson (JNJ) is slated to report 3Q 2015 earnings before the opening bell on Tuesday, October 13th. The earnings release is expected at approximately 7:45 a.m. EST 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.

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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. Estimize consensus estimate is $1.46. (Source: Estimize.com)
  • Revenues: Estimize consensus expectations are for $17.496 bln.

Adjusted Earnings Per Share (EPS) Guidance / Earnings Per Share (EPS) Guidance (FY2015).

  • 2015 full-year earnings guidance is currently $6.10 to $6.20. The Street estimate is $6.17. (Source: Yahoo! Finance)
  • J&J valuations: P/E of 16.7 compares to a 5-year average of 17.7; Price/Sales of 3.7 compares to a 5-year average of 3.3; Price/Cash Flow of 15.8 compares to a 5-year average of 14.6. The stock is yielding 3.1% compares to a 5-year average of 3.1%.
  • Analysts view J&J with 6 Buy, 7 Hold, and 1 Sell rating. (source: MarketBeat.com)
  • J&J insiders bought 2,500 shares over the last three months but sold a net 406,715 shares in the past year. (source: NASDAQ.com) In mid-2014, J&J authorized $5 billion in stock buybacks with no specific timeline.
  • 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 1.33%. Options are pricing in an implied move of 2.17% off earnings.

Recent News

  • 09/29: Deutsche Bank upgraded Johnson & Johnson to Buy from Hold after meeting with management. “With $34 billion in cash and marketable securities and just $19 billion in debt, J&J is ‘a master of its own destiny’ free to pursue M&A and/or licensing opportunities,” according to a post on TheStreet.com.
  • 09/22: UBS initiated coverage of Johnson & Johnson with a Buy rating and $119 price target on the belief that Wall Street is underestimating the value of J&J’s pipeline, according to a post on Barron’s.com.
  • 08/24: Cowen & Co. reiterated their Outperform rating and $114 price target on J&J after meetings with the company’s CEO citing that J&J’s diversification strategy is an asset in the evolving health-care delivery system, according to a post on Barron’s.com.
  • 08/18: Credit Suisse cited Johnson & Johnson among four major pharma stocks as undervalued on most valuation metrics, according to a post on Barron’s.com.

Technical Review

J&J made a 52-week high in mid-November 2014 at $109.49 and declined into the balance area of the 2013 second half, so remaining there would consolidate between the mid-$80s and mid-$90s. A 50% retracement of the move up that began in 2012 would target $87 and point and figure technicians have a tentative bearish price objective of $84. There appeared to be some rotation into J&J and out of Pfizer in the first half of 2014 but those stocks had come back together by February 2015. The healthcare sector has lagged in this recent market bounce and is the only sector still showing negative short-term growth rates. (Chart courtesy of StockCharts.com)

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Summary

While companies like Pfizer and Merck have restructured and narrowed their focus, Johnson & Johnson is nearing a conglomerate status full of consumer products, drugs and medical devices and products. Obamacare provides 10 million new potential customers who now have healthcare coverage but existing customers have seen some reductions, so the overall effect on J&J is still under review. The company has beaten estimates by 2c to 16c the last four quarters with mixed market reactions. Estimize consensus for an adjusted EPS of $1.46 on revenue of $17.496 bln compares to analyst consensus of $1.45 on revenue of $17.48 bln. Traders need to be alert for any further changes to FY2015 guidance.

 

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