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Johnson & Johnson Earnings Could Send the Dow Higher Still

By Dan Caplinger - Apr 11, 2013 at 4:33PM

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Let's look at the health care giant's coming earnings prospects.

Earnings season has begun, and next Tuesday Johnson & Johnson (JNJ 1.75%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed, knee-jerk decision.

Johnson & Johnson is a behemoth in the health care space, with a business that includes not only its well-known consumer health and personal-care products, but also a thriving pharmaceutical business and an extensive line of medical devices. The breadth of its offerings has given it a place among the Dow Jones Industrials (^DJI 0.03%). However, with so much going on at J&J, can the company hold itself together and take advantage of new growth opportunities? Let's take an early look at what's been happening with Johnson & Johnson over the past quarter and what we're likely to see in its quarterly report.

Stats on Johnson & Johnson

Analyst EPS Estimate

$1.40

Change From Year-Ago EPS

2.2%

Revenue Estimate

$17.46 billion

Change From Year-Ago Revenue

8.2%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will Johnson & Johnson make investors feel healthy this quarter?
In recent months, analysts have had mixed views on Johnson & Johnson's earnings prospects. They've raised their consensus on the just-finished quarter by a penny per share, but they've pulled back on their full-year 2013 EPS outlook by $0.08 and cut 2014 estimates even more sharply. Yet the stock continues to perform well, rising more than 15% since early January.

Lately, Johnson & Johnson has presented two different faces to investors. On one hand, the company has faced the challenge of dealing with a weak consumer-products business, as multiple recalls and close regulatory oversight of its production facilities have exacerbated J&J's problems. With its more focused consumer-goods business, Colgate-Palmolive (CL 0.01%) has worked harder at taking advantage of international growth opportunities than many of its rivals, and Colgate's strong overseas sales, in comparison to J&J's international weakness, show the effectiveness of that strategy. In particular, Asia has been a focus point for Colgate, with revenue from the region having risen 9% year over year compared with less than 3% growth overall. Moreover, Latin America represents Colgate's biggest region for sales, with more than half again the revenue its U.S. segment produces.

Yet in the pharmaceutical space, J&J has had great success. The approval of its Invokana treatment for type 2 diabetes bodes well for the company, as Invokana's approach to treating the disease is completely different from that of competing products. In particular, Merck's (MRK 1.58%) Januvia appears to have some substantial disadvantages compared to the drug, and with Januvia's patent set to expire in a few years, Invokana could have an even clearer path to success in the future. J&J also has a promising pipeline. Its rheumatoid arthritis drug sirukumab may bring J&J and partner GlaxoSmithKline (GSK 2.20%) billions in additional revenue if the drug gets approved.

It's hard to reconcile these two stories, and peers have taken steps to separate strong businesses from weaker ones through spinoffs and other corporate moves. J&J has resisted the idea of a full-scale breakup, but it has occasionally floated less ambitious ideas involving selling off smaller divisions.

In Johnson & Johnson's quarterly report, the company really needs to highlight its strategy for how it plans to differentiate its various businesses from specialist competitors in their respective spaces. Moreover, with quality control having been a longtime concern, how J&J addresses its problems will speak to whether it can fully recover from the mild reputational hit it has taken.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,261.90 (0.03%) $8.77
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$176.98 (1.75%) $3.04
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$93.55 (1.58%) $1.46
GlaxoSmithKline plc Stock Quote
GlaxoSmithKline plc
GSK
$44.52 (2.20%) $0.96
Colgate-Palmolive Company Stock Quote
Colgate-Palmolive Company
CL
$75.13 (0.01%) $0.01

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

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