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Johnson & Johnson Looks for Second-Quarter Strength to Keep Upward Momentum

By Dan Caplinger – Jul 13, 2017 at 8:05AM

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Investors want a good earnings report on July 18.

Healthcare conglomerate Johnson & Johnson (JNJ 1.02%) has been immensely successful over the years, and it has also done well for shareholders recently. With a nearly 15% rise so far in 2017, Johnson & Johnson is among the upper echelon of stocks in the Dow Jones Industrials, and its unique combination of pharmaceuticals, medical devices, and health-related consumer products has served the company well for a long time now.

Investors are preparing for Johnson & Johnson's second-quarter financial report on July 18, and they're hoping to see modest but solid growth in revenue and earnings from the healthcare giant. J&J has also built a reputation for topping expectations, making many shareholders even more optimistic. Let's take a closer look at what Johnson & Johnson is likely to tell investors and what you should expect to see.

Stats on Johnson & Johnson

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Data source: Yahoo! Finance.

What's ahead for Johnson & Johnson earnings?

Investors have been getting more optimistic about the long-term prospects for Johnson & Johnson earnings. Near-term projections have stayed stable, but expectations for full-year 2017 are up almost 1%, and 2018 projections have increased almost 4%. The stock has kept picking up ground as well, with a 9% rise since mid-April.

Johnson & Johnson's first-quarter earnings report didn't entirely satisfy the healthcare company's investors. Sales climbed just 1.6%, continuing a rather sluggish rate of growth on J&J's top line. The once high-flying pharmaceutical segment was largely to blame for the sales slowdown, with segment revenue rising less than 1% on a drop in domestic sales. It took solid performance from the medical device business to keep J&J's top line moving higher. Looking forward, Johnson & Johnson boosted its guidance because of its acquisition of Actelion, but the lack of complete clarity on the company's strategic direction from here left some shareholders with nagging uncertainties about what to expect.

Yet Johnson & Johnson has continued to show signs of long-term success. In late April, the company made its 55th straight annual dividend increase, boosting its payout by 5%. The stock responded with further gains that sent it to record highs, and investors seemed satisfied with the progress J&J has made and the promise it has for future growth. In particular, the company showed a pipeline of potential blockbuster drugs that could lead to 10 or more filings for FDA approval within the next four years.

Band-Aid bandages.

Image source: Johnson & Johnson.

Not everything is certain about Johnson & Johnson's future success. The company hopes to get existing medications approved for additional indications, but rising competition could pose a threat both to current blockbuster drugs and to those still in J&J's pipeline. Investors would also prefer to see faster growth from the medical device and consumer products segments, both of which have generally lagged behind their pharmaceutical counterpart over the past several years.

Some investors are also getting nervous about the stock's high valuation. Traditionally, shareholders have seen Johnson & Johnson as a defensive stock, and so they've tended to be more conservative in their valuations of its shares. Strong demand for dividend-paying blue chip stocks has pushed J&J's earnings multiples to their highest levels in more than 10 years. Those lofty multiples might make sense if Johnson & Johnson can keep producing success in its higher-growth pharmaceutical segment, but any further sluggishness there could eventually lead some investors to pull back on their growth expectations and give the stock a less expensive multiple going forward.

In the Johnson & Johnson earnings report, investors will once again want to see what the healthcare conglomerate's overall strategic vision is for the future. With the Actelion acquisition now behind it, J&J will need to show its investors that it has done a good job of working the newly acquired company's operations into its larger existing framework, and that it can take full advantage of the biotech's considerable promise. Otherwise, more Johnson & Johnson shareholders will shake their heads about the $30 billion price tag for the Swiss biotech company and wonder if it will pay off for J&J in the future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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