It's hard to satisfy investors -- even a strong performance can just lead us to want more. Case in point: Johnson & Johnson (JNJ 0.20%). Though the healthcare giant's stock has posted a solid double-digit percentage gain during the year -- outperforming the broader market -- in the past three months, it has essentially stalled.
So shareholders are hoping that when J&J releases its third-quarter financial report on Oct. 17, it will offer some upbeat news that supports its fundamental growth story. And they're also looking for reassurance that the company's recent strategies are paying off.
Right now, those following the stock expect to hear that Q3 brought continued modest gains in revenue and earnings. Yet the bigger question will be what new opportunities J&J might be exploring that could accelerate its expansion in the years to come. Let's look more closely at the healthcare conglomerate's prospects, and what investors should expect from its pending financial report.
Stats on Johnson & Johnson
|
Metric | Forecast |
|---|---|
|
Expected EPS Growth |
7.1% |
|
Expected Revenue Growth |
8.3% |
|
Forward Earnings Multiple |
17.3 |
|
Expected 5-Year Annualized Growth Rate |
6.9% |
Data source: Yahoo! Finance.
Can Johnson & Johnson surprise investors?
Investors have been guardedly hopeful that Johnson & Johnson will report earnings growth that was stronger than it had previously anticipated. Analysts' forecasts for Q3 have improved by about 1% in the past few months, and they've also boosted their expectations for 2017 and 2018. Yet is up just 1% since mid-July, and is trading with increased volatility.
Back in July, Johnson & Johnson's Q2 earnings report gave investors reason to be cautious. Weak results from its key pharmaceutical division included a decline in U.S. sales and a tepid 3% increase in its bottom line. Johnson & Johnson's medical device business picked up some of the slack, posting solid gains thanks largely to acquisitions. However, organic revenue from J&J's consumer business was down almost 1%, reflecting a retail environment in which growth has been hard to come by.
Image source: Johnson & Johnson.
Johnson & Johnson hopes that its $30 billion acquisition of Actelion will start to pay off in the near future. That price left many industry watchers feeling that J&J overpaid, but the move will add a pipeline of potential blockbusters to its already impressive arsenal of candidate treatments. Investors shouldn't expect huge initial contributions to the conglomerate's performance, but it did boost its guidance last quarter based on its outlook for Actelion.
Signs that J&J is getting more selective about where it deploys capital have also been encouraging. Last month, the company ended its partnership with Achillion Pharmaceuticals to develop a hepatitis C therapy. Given that its pharmaceutical rivals have already brought a number of new therapies to that market, and considering the shrinking opportunities for any future arrivals, Johnson & Johnson was wise not to chase a return on its sunk costs. With this decision, the company should save considerable amounts of money that it can use to better effect elsewhere.
In addition, simple changes in perception might turn investors more positive on the stock. Easier comparisons against year-earlier results will make growth rates appear to increase, and attacks from politicians in Washington over excessive drug prices have faded. Between the improving consumer environment, the potential for breakthroughs in research, and the possibility of new acquisitions, Johnson & Johnson has a lot going for it.
Investors will want to look closely at Johnson & Johnson's earnings report to see where it's focusing its attention. Despite its size, from the healthcare conglomerate needs to drill down on its best opportunities for growth. That way, it will be in a better position to capitalize on favorable conditions when they come.
