Why Johnson & Johnson Will Move the Dow Tomorrow

The health care giant is among the first Dow components to report their second-quarter earnings tomorrow.

Jul 14, 2014 at 12:00PM

On Monday, the Dow Jones Industrials (DJINDICES:^DJI) managed to climb back above the 17,000 level, rising by triple digits right out of the gate and holding on to gains of 130 points as of 11:45 a.m. EDT. Earnings season kicks into high gear this week, and much of today's rise came in the wake of better-than-expected performance from a former Dow component bank. Yet even though financial companies will play a big role in the Dow's earnings this week, Johnson & Johnson (NYSE:JNJ) is also set to play a pivotal role in setting the tone of the new earnings season.

Source: Johnson & Johnson.

Johnson & Johnson will issue its earnings release tomorrow morning, with its most recent quarterly report coming out at around 7:45 a.m. EDT. After that, the Dow component company will have its earnings meeting and conference call at 8:30 a.m. EDT to discuss the results, with a live webcast available at Johnson & Johnson's investor-relations website.

Investors are enthusiastic about Johnson & Johnson's earnings prospects, as the stock has risen to all-time highs. Expected growth of around 5.5% in revenue and 4% in earnings per share might seem somewhat modest for a stock hitting new record levels, but unlike many of its peers among the Dow Jones Industrials, Johnson & Johnson has convinced investors that it has some strong growth prospects that could accelerate in the future.

Jnj Bandaid Embedded

Specifically, Johnson & Johnson has banked on the continuing success of its pharmaceutical division in order to drive gains for the future. In recent quarters, most or all of Johnson & Johnson's overall growth has come from its pharma segment, with much more sluggish performance and even outright declines in some cases for its medical-device and consumer goods businesses. For its part, Johnson & Johnson still sees some opportunities for better results in those two lagging divisions, but the company has taken a more measured approach in focusing on efforts with the highest chance of reaching favorable outcomes, rather than simply aiming to grow those businesses more broadly. Steps like the completion of its $4 billion sale of its Ortho-Clinical Diagnostics business to Carlyle Group point to J&J's overall strategy of focusing on its best prospects.

Investors will want to see that pharma can sustain the pace of its growth. Last quarter, Johnson & Johnson saw impressive results up and down its sales lists, with treatments like psoriasis drug Stelara and prostate-cancer fighter Zytiga seeing revenue soar. More well-established products like its Remicade arthritis drug didn't see such huge percentage gains, but they nevertheless contributed to overall growth for the company. As Remicade approaches patent expiration beginning next year in Europe, Johnson & Johnson investors will increasingly look at the company's pipeline to make sure that it can replace revenue losses from patent-cliff issues.

Johnson & Johnson's results will move the Dow tomorrow, and the entire pharmaceutical sector will be watching to see if the company can sustain the pace of its recent growth. Good news from Johnson & Johnson could send its fellow drug stocks within the Dow Jones Industrials and beyond higher, and that in turn could spur on the Dow's bull run.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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