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Johnson & Johnson Earnings Report Shows Strength

By Dan Carroll - Oct 16, 2012 at 2:40PM

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Did the healthcare giant live up to expectations this quarter?

An earnings season littered with precautionary red flags has finally arrived for the major components of the Dow Jones Industrial Average (Index: ^DJI), and health care leviathan Johnson & Johnson (NYSE: JNJ) showed up to report before the market opened Tuesday. The health care sector has been flying along recently, but with fears of a dramatic downturn in this quarter's earnings season, it's natural for investors to approach company reports with some trepidation -- even for a company as well-diversified and powerful as J&J. Let's see if the company managed to live up to expectations.

A clean bill of health
Last quarter, a strong dollar weighed  heavily on Johnson & Johnson's earnings as year-over-year revenue declined. Wall Street had still set increasing expectations for today's report, although nothing insurmountable: Analysts had projected revenue growth of more than 5%, rising to $16.9 billion. The Street projected earnings per share would fall, however; experts set the company's target at $1.21, down $0.03 from last year's third-quarter mark.

Never fear, shareholders: Johnson & Johnson didn't let you down . For the first time in a year, J&J beat the Street's expectations and did so soundly. Even as the company's profit declined 7% for the quarter, earnings of $3.5 billion -- or $1.25 a share -- surpassed both projections and last year's third quarter total. Revenue hit a home run for J&J as it swelled to more than $17 billion, an increase of 6.5%. Increased R&D costs, as well as pricey acquisitions, weighed on profits – although one certain acquisition paid off in a big way.

The well-received news vindicated the company's  $19.7 billion purchase of medical device maker Synthes back in June. Synthes, which creates trauma and orthopedic devices among other medical equipment, pushed worldwide revenue  up by almost 6%.

Wall Street couldn't contain its excitement over the report. Piper Jaffrey analyst  Matt Miksic echoed the sentiments of analysts in saying, "Things can't help but look more positive for the company...". Johnson & Johnson shareholders certainly had to think so as the stock flirted with 52-week highs on the news, up more than 1 percentage point.

Some hiccups did show up in growth among the company's individual businesses, however -- but at its core, Johnson & Johnson looks as strong as ever.

Woes and wonders
Like last quarter, currency fluctuations  once again weighed on J&J's numbers. Total revenue took a 4.3% hit from currency troubles alone and dropped total international sales by 7.5%. While international growth was actually quite good for the company at 8.9%, shareholders won't be seeing much of that translated to the balance sheet. Even with the significant impact, investors shouldn't worry too much about this kind of impact. Given economic volatility current raging across the world, it's only natural to expect currencies to follow that pattern.

Johnson & Johnson's consumer health division doesn't look so healthy by comparison. A plethora of recent recalls  over the past few years have hammered this section of this company, and the results weren't pretty. Consumer health revenues fell by more than 4%, and while the division is J&J's smallest by sales, investors should keep an eye out for further developments here. Recalls of such household products as Tylenol , along with slowing sales in baby and women's health products, aren't helping the consumer health branch dig out of its hole.

Fortunately, the company's larger two divisions of pharmaceuticals and medical devices continue to excel. It's here where the company makes the lion's share of its money, and investors should share in the optimism. Pharmaceutical sales recorded gains  of 7% as the company's star inflammatory disease drug Remicade, which has seen impressive sales growth year-over-year since 2009, continued to grow.

J&J has succeeded brilliantly with Remicade, scoring a big win last April  as Merck (NYSE: MRK) relinquished exclusive marketing rights to the drug in several key international areas. Given that Remicade's patent exclusivity extends until 2018, J&J has plenty of time to continue milking this multibillion-dollar superstar for all it's worth.

Johnson & Johnson's largest and final business division, its medical device branch, stood out as the best performer this quarter. The Synthes acquisition helped push the division's sales up 12.5% even with currency fluctuations factored in. The numbers completely negated any investor fears over declining demand with the global economy's shakiness, especially in Europe. Domestic sales truly took off here, however, as those rose by an astounding 18.3%.

Steady wins the race
Today marks a huge win for Johnson & Johnson, especially in light of third-quarter earnings fears and the patent cliff looming for Big Pharma companies. J&J doesn't face the same urgent patent danger that pharmaceutical rivals such as Eli Lilly  (NYSE: LLY) and Pfizer (NYSE: PFE) must battle, and its diversified businesses allow one sector to slow as long as the other two succeed -- as this quarter showed with sluggish consumer health sales.

Between the superb management of star products like Remicade to outstanding pickups such as the Synthes acquisition, Johnson & Johnson has shown without a doubt that its heart is still beating strong. If you're looking for a rock-solid company in the middle of economic doubt, there's no better place to start than this health care giant.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$175.85 (1.10%) $1.91
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,253.13 (0.00%) $0.00
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$52.47 (3.59%) $1.82
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$93.55 (1.58%) $1.46
Eli Lilly and Company Stock Quote
Eli Lilly and Company
LLY
$298.85 (4.39%) $12.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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