At some point, companies get so large that growing sales and earnings becomes increasingly difficult. Warren Buffett has always bemoaned the difficulties of increasing earnings at his conglomerate, Berkshire Hathaway
On Tuesday, Johnson & Johnson announced third-quarter results, and the slowing growth continues. Sales grew 8% compared to the third quarter of last year, to $13.3 billion. Earnings came in at $2.8 billion and $0.94 per share, representing growth of 10.6% over 2005.
Exclude the $115 million earnings hit from acquired in-process research and development charges, though, and earnings would have come out close to $0.98 a share, a 15% increase over 2005. For large, diversified conglomerates like Johnson & Johnson, it would be easy to massage earnings numbers, what with the plethora of non-cash charges that the company takes every quarter. But excluding R&D charges from acquired companies appears valid for year-over-year comparison's sake.
Revenue growth was sluggish across Johnson & Johnson's three main divisions: consumer, medical devices, and pharmaceutical sales. Only international consumer product sales showed any sort of increases to get excited about, with 14% growth.
|
Y-O-Y Sales Growth* |
Percent of Total Sales |
|
|---|---|---|
|
Consumer Products |
8.1% |
18.5% |
|
Medical Devices |
6.1% |
37.2% |
|
Pharmaceuticals |
6.7% |
44.3% |
Margins have been fairly steady for Johnson & Johnson at 72.5% gross margins and 20.8% net margins. While the company was able to shave 150 basis points off its selling, general, and administrative spending, these savings were offset because R&D expenses (including the acquired R&D ones) increased by 190 basis points.
Johnson & Johnson management did say that 2006 profits would probably come in at $3.72 to $3.74 per share. That would be an increase of about 9% over the $3.42 a share the company earned in 2005, but with the stock trading at a forward P/E of nearly 18, it's hard to get excited about this sort of earnings growth, even with the 2.3% dividend yield. There are just too many smaller and faster-growing pharmaceutical companies for my investing dollars.
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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.
