Intel and J&J Report
...both lookin' strong

by Jeff Fischer (TMFJeff)
and Brian Graney (TMFPanic)

ALEXANDRIA, VA (Oct. 13, 1998) -- The first two companies the Drip Port bought reported earnings today and both were strong. Intel smushed estimates of $0.80 per share, reporting $0.89 on a stronger-than-anticipated jump in revenue and gross margin. Johnson & Johnson chimed in with earnings of $0.70 per share, in-line with estimates despite difficult currency comparisons overseas. The Big J grew third quarter pharmaceutical sales 16% domestically and 9.4% worldwide, to $2.1 billion. Today, we have coverage of both companies. Brian is here to share thoughts on Intel.

Brian, take it away...

Intel (Nasdaq: INTC) finished the day down $1 7/8 to $83 9/16, as Wall Street and the rest of the world hunkered down for the company's fiscal Q3 earnings report. Shortly after the closing bell rang, the chip giant announced third quarter earnings of $1.56 billion, or $0.89 per share, on $6.7 billion in total revenues. The EPS figure was only slightly higher than last year's $0.88, but was solidly above the $0.80 expected by analysts.

The company posted some nice top-line growth, as revenues were up 9% from the $6.2 billion recorded during the same quarter last year and up 14% from Q2's $5.9 billion. And even though Intel's Q3 net income was down slightly from last year's $1.57 billion, EPS managed to rise thanks to a 44 million share reduction in the firm's diluted share count over the past year. The company said it repurchased a total of 20.1 million shares during Q3 alone, which is music to its investors' ears.

Total revenues were higher than they ever have been in the third quarter, thanks to healthy demand for Intel chips by box makers during the all-important back-to-school and holiday selling seasons. "We had growth across nearly all of our geographies and product lines, including strong microprocessor sales," president and CEO Craig Barrett said in a press release. "In the third quarter, the PC industry recovered from its inventory problems and is benefiting from strong seasonal demand.'' The only major product category bucking the positive vibe was embedded processor and microcontrollers, which suffered from a decline in shipments during the quarter.

Looking into its crystal ball a bit, Intel forecasted that its Q4 revenues will be slightly higher than in Q3. This matches nicely with management's earlier guidance that the company would log higher sales in the second half of the year compared to the first half. Gross margins will be flat with or possibly even slightly higher than Q3's 53% figure, which was up from Q2's 49% and consistent with the company's traditional 50% margin target.

Thank you to Brian for that cleanly composed (if I do say so) review of the quarter. After reporting $0.89 per share, the current $0.88 estimate for Intel's fourth quarter will likely be notched higher, though perhaps not by a large amount. Expenses are expected to climb 3% to 5% in the coming quarter, while revenue and earnings should rise just slightly. Intel's admission that it's laying off more employees in order to cut costs was perceived as one negative from the conference call, and that might keep the stock lower, which is good -- we'll likely be buying more in the next few months.

Following today, the fiscal 1998 earnings estimate of $3.18 per share might be bumped higher by fifteen cents or so, meaning that Intel trades at 25 times potential 1998 earnings. Beyond that, it trades at 22 times current 1999 estimates. For the full earnings press release and business outlook, click here; meanwhile, Intel's conference call replay will be available from later this evening. (Also of note before moving on, Intel recently increased its dividend payment by 33%, to $0.16 per share. For the short jive on that, click here.)

Next up, the Big J.

Perhaps ironically, Brian and I are duking it out next month in a Dueling Fools column on Johnson & Johnson (NYSE: JNJ). I'll be the bull, and Brian will be the growling bear. One of his bearish arguments concerns JNJ's continued loss of market share in the stent and suture market. He has a point. Stiff competition has taken a bite from the company's Professional Products sales, and the Cordis' stents division is suffering a decline in revenue. This quarter, sales in the Professional department overall fell 4.4% domestically and 2.2% overall. Internationally, sales in this segment gained 4.8% in local currency, but that was wiped out by the strong dollar.

Even so, Johnson & Johnson's continued strategy of acquisition and strategic partnerships, as well as developing new products, of course, is helping to grow revenue in its various departments, even if it's losing market share in some products. During the quarter, Johnson & Johnson reached an agreement to acquire DePuy in a billion dollar deal. DePuy is the world's leading orthopaedic product company, offering reconstructive, spinal, trauma, and sports medicine. Also, Dermabond was approved for marketing this quarter and initial U.S. sales have been strong. The new product is a topical skin adhesive for wound closure.

Returning to the Pharmaceutical division: sales rose 9.4% worldwide to $2.1 billion, with a 16% gain in domestic sales. Especially strong were sales of Risperdal, an antipsychotic medication, Duragesic, a skin patch for chronic pain, and Procrit, for anemia, as well as oral contraceptives.

Finally, sales in the company's Consumer segment were nearly unchanged. Domestic sales increased 0.6% while international sales dropped 0.3%. International sales actually rose 6.5% in local currencies, but the strong dollar impacted sales by negative 6.8%. The company's Neutrogena line is continuing to absorb money, reporting strong sales (it's good stuff!).

Johnson & Johnson chairman and CEO, Ralph S. Larsen, cited "continued efforts to enhance productivity and take unnecessary costs out of the business" as instrumental in growing the company's earnings even in internationally difficult times. Of course, also cited were new products. Mr. Larsen shared that he's particularly pleased with the performance of the pharmaceutical business.

For the quarter, revenue was $5.7 billion and net earnings totaled $961 million, up 2.5% and 12.4% respectively. Diluted earnings per share of $0.70 rose 11.1% from last year. Over the first nine months of this year, sales totaled $17.3 billion and net earnings were $3.0 billion, or $2.17 per diluted share, up about 11% from last year. J&J trades at 28.9 times this year's expected earnings (earnings that it's on track to match), and 25.7 next year's estimate of $3.13 per share. For the full earnings press release, please click here.

To discuss today's results, please visit the Intel message board, the JNJ message board, or our Drip Companies board. We hope to see you out there.

For now, Fool on!

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10/13/98 Close

Stock Close Change CPB 55 13/16 + 11/16 INTC 83 9/16 -1 7/8 JNJ 77 23/32 +1 9/32
Day Month Year History Drip (0.21%) 0.88% 13.04% (3.73%) S&P 500 (0.28%) (2.18%) 2.52% 4.58% Nasdaq (2.37%) (10.89%) (3.88%) (5.29%) Last Rec'd Total# Security In At Current 09/02/98 8.027 CPB $52.867 $55.813 09/01/98 9.727 INTC $80.238 $83.563 09/08/98 6.564 JNJ $70.161 $77.719 Last Rec'd Total# Security In At Value Change 09/02/98 8.027 CPB $424.36 $448.01 $23.65 09/01/98 9.727 INTC $780.50 $812.84 $32.34 09/08/98 6.564 JNJ $460.54 $510.15 $49.61 Base: $2000.00 Cash: $286.07** Total: $2057.06

The Drip Portfolio has been divided into 85.474 shares with an average purchase price of $23.399 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
9/21/98: Sent $77 to buy/enroll in MEL. 9/30/98: Sent $100 to buy more JNJ.