The year isn't kicking off on a great note for Johnson & Johnson (JNJ 1.49%). While the broader market has performed pretty well since early January, shares of the healthcare giant have dropped by 6%. Johnson & Johnson is facing issues that are causing investors to look elsewhere (more on those below). Even so, there are good reasons to stick with the pharmaceutical giant. Let's look into why opportunistic investors should seriously consider buying shares of Johnson & Johnson as they sink.
Putting poor financial results in perspective
On Jan. 24, Johnson & Johnson released its fourth-quarter and full-year 2022 financial results. The company's performance in the period did not impress the market, understandably so. In the fourth quarter, Johnson & Johnson's sales dropped by 4.4% year over year to $23.7 billion. It's rarely a good thing when a company's top line declines, but let's look deeper into why that happened with Johnson & Johnson.
The company dealt with a combination of headwinds, including foreign exchange rate dynamics and inconsistent and unpredictable COVID-19-related vaccine sales. In the fourth quarter, Johnson & Johnson's sales increased by 0.9% in constant currency; also, putting aside coronavirus vaccine revenue, the company's top line grew by 4.6%, an otherwise decent performance for a pharmaceutical company of this size.
Meanwhile, Johnson & Johnson's adjusted earnings per share increased to $2.35 for the quarter, 10.3% higher than the year-ago period. This year, Johnson & Johnson should complete the spinoff of its consumer health segment. While that will decrease its overall diversification, it should help increase revenue growth in the long run, as the drugmaker's consumer health segment is usually less impressive on this front. Also, sales of its coronavirus vaccine could fall even more as the pandemic continues to recede.
For the fiscal year 2023, Johnson & Johnson expects to report sales of $97.4 billion (excluding its COVID-19 vaccine) at the midpoint of its guidance, which would represent a 5% year-over-year increase. The company projected adjusted earnings per share (EPS) growth of 4% year over year to $10.55. While not exceptional, these results would be better than what it showed in 2022, with full-year sales last year increasing by 1.3% to $94.9 billion and adjusted EPS growth of 3.6% year over year to $10.15.
Can legal problems sink Johnson & Johnson?
Johnson & Johnson's rather unexciting recent financial results aren't the only reason the company isn't doing well so far this year. The pharmaceutical giant recently learned that a legal move it had initiated to limit the liability related to thousands of lawsuits over its talcum-powder products, which allegedly caused cancer, was rejected.
Johnson & Johnson had decided to pin all that liability onto a newly created subsidiary called LTL Management and file bankruptcy protection for this subsidiary. But a Court of Appeals dismissed Johnson & Johnson's attempt to sidestep its talc-related lawsuits with this move. What's next for Johnson & Johnson in this saga? The company will appeal the decision, so the story is far from over.
But if Johnson & Johnson loses the appeal and is eventually found liable for its wrongdoing in the case, it could cost the company billions.
With that said, it's worth noting that one of the reasons the court dismissed Johnson & Johnson's move to avoid liability in this way is because the company's subsidiary, LTL Management, did not face the kind of financial problems bankruptcy was supposed to address due to its link to Johnson & Johnson and the pharmaceutical giant's "exceptionally strong balance sheet."
The opinion goes on to say that: "At the time of LTL's filing, J&J had well over $400 billion in equity value with a AAA credit rating and $31 billion just in cash and marketable securities. It distributed over $13 billion to shareholders in each of 2020 and 2021." Johnson & Johnson's robust financial situation is precisely why it can absorb billions in liability from these lawsuits.
Facing this liability could have a material impact on the company's financial results, perhaps for one or several quarters. But it is hard to imagine Johnson & Johnson being forced into insolvency as a result. That's why those who plan on remaining shareholders for a while shouldn't be too worried.
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Weather the storm with Johnson & Johnson
This year may prove difficult for Johnson & Johnson, with lingering economic problems, the impact of its coronavirus vaccine sales, and the legal issues it is dealing with. But this drugmaker has been around for decades and has provided excellent returns in the long run. Of course, past performance isn't a guarantee of future success.
But there is a reason why Johnson & Johnson has been so successful for so long, and many of these reasons remain: The company constantly develops new medicines and technologies within its medtech division, and it has generally reported solid revenue and earnings. Even with the headwinds it is encountering right now, Johnson & Johnson can continue to do just that for a while.
