Johnson & Johnson (JNJ) before-the-bell Tuesday reported a strong first quarter, with sales up more than 5.5% and earnings eking out an annual increase. Shares of the Dow component and Club holding should not be losing 2.5% on these kinds of results. J & J’s first-quarter sales of $24.75 billion exceeded the Refinitv consensus estimate of $23.67 billion. On an adjusted operational basis, which excludes the impact of acquisitions and divestitures as well as currency fluctuations, sales rose 9% year over year. Adjusted diluted earnings came in at $2.68 per share, a solid beat versus the $2.50 per share estimate. On an operational basis, earnings per share (EPS) increased 3% year over year. Bottom line Given J & J’s strong Q1 results and rosy full-year outlook, we’re surprised to see the stock sell-off so harshly, trading below $160 per share at the lows of Tuesday’s session. We see two possible reasons. First, Covid vaccine-related sales, a less sustainable source of revenue, were so strong that they made the magnitude of the overall quarterly revenue beat seem less impressive to some investors. We’re leaning toward the second reason: Management’s 2025 Pharmaceutical sales target because J & J’s results would have exceeded estimates even without strong vaccine sales. On the post-earning call, management said they see Pharmaceutical sales in 2025 closer to $57 billion than the $60 billion forecast two years ago. They blamed current currency dynamics. That’s still well above analyst estimates of roughly $54 billion. However, with Wall Street already unconvinced about the $60 billion target, this latest update provided analysts with little reason not to be more confident in their own, lower, estimate. In fact, analysts may now be wondering if the roughly $54 billion estimate they were modeling needs to come down not up. The $60 billion figure for Pharmaceutical sales in 2025 was provided at the end of 2021. After that target was publicized, analysts were still only modeling about $55.5 billion. If the analysts didn’t buy into the initial company target, there is little reason to buy into the new one. If anything, they may be debating the need to raise their currency headwinds assumptions (and therefore trim their own forecasts). While we aren’t in the game of forecasting currency movements, especially on a two- to three-year time horizon, this new target is potentially conservative given that management is utilizing current exchange rates. The dollar index against a basket of major currencies remains historically elevated, though well off October’s 20-year highs. If the dollar were to continue to fall, the currency drag would lessen. And, that could get management closer to their initial $60 billion target for Pharmaceutical sales in 2025. Regarding the ongoing Talc litigation, management reiterated that J & J talcum powder products are safe while adding that the recent refiling by subsidiary LTL Management for bankruptcy should in no way be taken as an admission of wrongdoing. LTL was created to address the talc lawsuits. That said, management said their ultimate goal is for an “equitable and efficient resolution of the cosmetic talc litigation against the company,” and they believe this refiling is the way to get that done. We agree that the best thing for shareholders is to resolve this issue, which has plagued the stock for far too long. While the proposed $8.9 billion settlement is no small price to pay to do that, it’s easier to stomach when you consider that it would be paid out over a 25-year period and that J & J’s adjusted net earnings in the first quarter were just over $7 billion. The company is expected to earn nearly $25 billion in 2023 alone. While we understand the Street’s desire to dig into the 2025 Pharmaceutical sales dynamic, we believe weakness in the stock represents a buying opportunity. Additionally, the planned spinoff later this year of J & J’s Consumer unit as a standalone company, called Kenvue, represents a positive near-term value-creating catalyst. The potential for the Talc lawsuit to be resolved near-term would represent a lifting of a major multi-year overhang at terms that are highly manageable given the dollar amount and time frame. Balancing these factors, we’re reiterating our 1 rating , however, trimming our price target to $195 per share in an acknowledgment that management needs to give investors more reason to believe their 2025 Pharmaceutical sales forecast. Ultimately, at the current price of about $160 per share, the stock price fails to reflect the improving fundamentals of the business, as seen by the continued strength in Pharma, the China recovery in MedTech, and the solid growth of the consumer franchise. Therein lies the opportunity. Guidance Compounding the strong quarterly results, management increased their full-year guidance. Reported sales for the full year are now expected to grow 5.5% to 6.5%, arriving in the range of $97.9 billion to $98.9 billion, which at the $98.4 billion midpoint is ahead of the $97.7 billion consensus estimate coming into the print. This is up from the $96.9 billion to $97.9 billion range provided in January. On an adjusted operational basis, sales are now expected to increase between 4.5% and 5.5%, up from the previously provided 3.5% to 4.5% range. Management’s full-year adjusted earnings forecast was also revised higher, with the team now targeting EPS of $10.60 to $10.70, which at the $10.65 per share midpoint comes in ahead of the $10.51 consensus estimate coming into the print. This range is up from the $10.45 to $10.65 range provided in January. On an adjusted operational basis, management is targeting earnings to be in the range of $10.50 to $10.60 per share, up from the $10.40 to $10.60 range provided in January. Consumer Looking at J & J’s three units, Consumer sales in the first quarter rose about 7.4% to a better-than-expected $3.85 billion (as reflected in the table above). That’s thanks to increased prices and strong consumer demand, the combination of which speaks to the pricing power of the Johnson & Johnson, soon-to-be Kenvue, brand. On the call, CFO Joseph Wolk said the team continues to believe that the pending separation of the Consumer unit from J & J’s Pharma/MedTech will create two companies that are “more agile, focused and competitive.” The plan, “assuming accommodative market conditions,” remains on track to be completed in 2023. Pharmaceutical In addition to the commentary around 2025 Pharmaceutical sales estimates, revenue for the unit in the first quarter rose 4.2% to $13.41 billion, exceeding estimates. While the team did call out an “acceleration of some current and potential upcoming launches” for individual drugs, these positives have been balanced by competition for Imbruvica, which has been “above what was anticipated in 2021.” Imbruvica, which is a type of cancer growth blocker , saw sales drop more than 20% to $827 million in the first quarter, though that was still higher than expected. MedTech Strength was also seen in the company’s MedTech division, which along with Pharmaceutical, will be bundled together to make up the new Johnson & Johnson after the split. MedTech sales in Q1 rose 7.3% to $7.48 billion, beating estimates. On the call, management noted that, with the finalization of the Abiomed acquisition back in December, the MedTech division now has 12 platforms with over $1 billion in annual sales each. Regarding Abiomed specifically, the team said that while it’s still early, they have been pleased thus far with the integration process and performance of the business. They said that patient utilization of Abiomed technologies was up, in percentage terms, in the mid-to-high teens in the U.S. and Europe, while increasing 30% in Japan. Importantly, the team also said that while all regions outside of China were already seeing medical procedures trend “well above pre-Covid levels,” China finally rebounded. In March, it saw procedures slightly exceed pre-Covid levels there as well. Capital Allocation Management announced a 5.3% increase to the company’s quarterly dividend from $1.13 per share to $1.19. While a dividend raise is expected from Johnson & Johnson as the company is a Dividend King — a Wall Street designation reserved for companies that have raised their payout for 50 or more consecutive years — the increase serves as yet another reminder of why we like stocks even when bond yields are rising . (Jim Cramer’s Charitable Trust is long JNJ . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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A logo sits on a wall inside Johnson & Johnson’s innovation centre in London, U.K., on Thursday, July 18, 2013.
Simon Dawson | Bloomberg | Getty Images
Johnson & Johnson (JNJ) before-the-bell Tuesday reported a strong first quarter, with sales up more than 5.5% and earnings eking out an annual increase.
Shares of the Dow component and Club holding should not be losing 2.5% on these kinds of results.
