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Can Johnson & Johnson Get Its Mojo Back?

By Dan Caplinger – Apr 13, 2018 at 8:15AM

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The healthcare conglomerate has started the year weak. Are better times ahead?

The stock market has gone through a correction to begin 2018, and healthcare giant Johnson & Johnson (JNJ -0.71%) has been particularly susceptible to the market's declines. A 7% decline so far this year isn't a huge downward move, but it still flies in the face of beliefs among many investors that the company's solid performance in 2017 reflected its stability in the face of market uncertainty.

Shareholders in the conglomerate hope that Johnson & Johnson's first-quarter report on April 17 will quell concerns about its future performance. The company will have a high bar to overcome in order to satisfy investors fully, but it should get some help from lower tax rates and a healthy pipeline of candidate treatments on the pharmaceutical side of the business. Let's look more closely at Johnson & Johnson and what we're likely to see in its coming financial report.

Red-letter stylized J&J logo.

Image source: Johnson & Johnson.

Stats on Johnson & Johnson

Key Stats

 

Expected Quarterly EPS Growth

9.3%

Expected Quarterly Revenue Growth

9.2%

Forward Earnings Multiple

15.2

Expected 5-Year Annualized Growth Rate

7.8%

Data source: Yahoo! Finance.

How will Johnson & Johnson do?

Investors have ramped up their expectations recently on Johnson & Johnson's earnings prospects. J&J is now expected to earn $0.25 per share more in 2018 than previously believed, amounting to about a 3% rise. Yet that's done little to help the stock price, which has fallen more than 12% since late January.

Some of the negative sentiment surrounding Johnson & Johnson started after its fourth-quarter earnings report earlier this year. A lot of attention went to the fact that the company reported a loss, stemming entirely from the one-time negative impact of tax reform on the multinational to the tune of $13.6 billion. That tax charge hid solid growth in revenue and adjusted earnings, but investors seemed concerned about sales declines in key products like autoimmune drug Remicade and diabetes treatment Invokana.

The other major problem that Johnson & Johnson faces is that although its pharmaceutical segment has continued to pull more than its fair share of the load of helping the conglomerate stay in growth mode, other businesses have fallen off. The consumer products segment has been barely able to keep sales rising over the past year. J&J's medical device business faces similar challenges, and it's taken substantial acquisitions to help its top line moving in the right direction.

Still, Johnson & Johnson has a plan for how to rebuild its positive momentum. Despite Remicade's vulnerability to biosimilar competition, the immunology niche overall has substantial prospects for growth, especially by looking to find safer treatments that work better than the existing medications on the market. At the same time, J&J expects to look at existing treatments like cancer fighters Zytiga and Darzalex and seek ways to expand their use to new indications. Success in that vein will help the company boost each drug's overall sales by identifying and serving an expanded addressable market. Finally, a new focus on areas like neuroscience could help to broaden J&J's overall business and tap into opportunities that it hasn't fully explored before.

Investors will also be curious to see how Johnson & Johnson decides to return some of its expected tax-reform bounty to shareholders. The company traditionally makes a dividend increase announcement at this time of year, and some believe that some of the billions in repatriated cash could go back to investors in the form of dividends or stock buybacks. That could result in much faster dividend growth than the 5% boost that shareholders got in 2017.

Johnson & Johnson has the chance in its coming earnings report to reassure investors that it has the business strength to keep growing aggressively throughout 2018 and beyond. Those who follow J&J will want to ensure that the company is doing what it has said it will do to support all of its businesses in maximizing their growth opportunities going forward.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has the following options: short May 2018 $140 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.

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