Turnaround at Johnson & Johnson? Let's Do Some Math.

Johnson & Johnson (NYSE: JNJ  ) increased 3.7% yesterday as the company raised 2011 guidance by $0.10 on either side of the range. The start of a comeback? Let's do the math.

Dive deeper into that $0.10 raise and we see that $0.08 of it was due to currency changes. Johnson & Johnson is benefiting from a weaker dollar, which increases sales in foreign currencies when they're translated back into U.S. dollar. Eli Lilly (NYSE: LLY  ) said it experienced the same increase in revenue, but that costs denominated in foreign currencies counteracted much of the increase. Apparently that's not as true for Johnson & Johnson, but it's not like the company did anything to deserve the bump in earnings nor can it count on the currency level continuing.

That still leaves $0.02 of operational gain, but the company will get about $0.05 from its settlement with Merck (NYSE: MRK  ) over Remicade and Simponi this year. Last time I checked, five was more than two, which means that there's actually a new negative effect on earnings.

The culprit? Recalls, of course. While the Food and Drug Administration consent decree didn't come with any up-front fines, the third-party overlord checking the consumer health-care products will slow down shipments and cause additional costs to the tune of $0.06 per share.

What if none of these things had happened? Subtract out the benefits and add back the negative items: $0.10-$0.08-$0.05+$0.06 and it appears Johnson & Johnson thinks it'll be about $0.03 per share better off this year than it did three months ago.

That's less than a 1% increase over the previous guidance. Better than nothing, but I don't think Johnson & Johnson and its investors are out of the woods just yet. The company needs to get its manufacturing on target and then earn back consumer health-care customers that it has lost to Bayer, Merck, Pfizer (NYSE: PFE  ) , and generic drug-maker Perrigo (Nasdaq: PRGO  ) .

Interested in keeping track of Johnson & Johnson as it makes its comeback? Click here to add it to your personalized My Watchlist. And if you want to see what our Motley Fool Inside Value newsletter team thinks of Johnson & Johnson, why not try it, or any of our Foolish newsletter services, free for 30 days.

Johnson & Johnson and Pfizer are Motley Fool Inside Value recommendations. Johnson & Johnson is a Motley Fool Income Investor choice. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Johnson & Johnson. Alpha Newsletter Account, LLC owns shares of Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 20, 2011, at 3:25 PM, energysystems wrote:

    I agree about the irrational jump in JNJ this week. Although I'm a fan of the underlying business, the recall after recall after recall does not give me any confidence. I'd be a buyer of JNJ in the low to mid 50 level, but I think it'll be a couple more down quarters until we see that level.

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