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Earnings Beat from J&J Again, View Up

Zacks Equity Research

Johnson & Johnson (JNJ) beat expectations yet again with third-quarter 2013 earnings (excluding special items) coming in at $1.36 per share, beating the Zacks Consensus Estimate of $1.31 per share and 8.8% above the year-ago earnings of $1.25 per share.

Despite the negative impact of currency fluctuation and the performance of the Medical Devices & Diagnostics segment, Johnson & Johnson recorded growth on the back of strong product sales as well as the restoration of supply of several over-the-counter (:OTC) products.

Johnson & Johnson’s third quarter sales increased 3.1% year-over-year to $17.6 billion, above the Zacks Consensus Estimate of $17.4 billion. While operational factors favorably impacted sales by 4.7%, currency fluctuations had a negative impact of 1.6%.

Including one-time items, Johnson & Johnson reported third quarter earnings of $1.04 per share, a penny short of the year-ago earnings of $1.05.

The Quarter in Details

Third quarter sales increased 1.7% in the domestic market. Meanwhile, international sales grew 4.2%, consisting of 7.1% operational growth and 2.9% negative currency impact. Apart from the Medical Devices & Diagnostics segment, the other segments recorded growth during the reported quarter.

The Medical Devices & Diagnostics segment posted sales of $6.9 billion, down 2% year-over year. Sales declined 4.2% sequentially. While operational factors positively impacted Medical Devices & Diagnostics segment sales by 0.3%, foreign exchange movement negatively impacted sales by 2.3%.

Sales in the domestic market declined 4.2% year-over year to $3.2 billion; international market sales slipped 0.1% year over year to $3.8 billion.

Several Medical Devices & Diagnostics markets have been facing challenges in the form of European austerity measures, pricing pressure and a slowdown in elective surgeries, which have all contributed to more tempered growth rates.

Pharmaceutical segment sales increased 9.9% year-over-year to $7 billion (operational growth of 10.9% and negative currency impact of 1%). Sales in the domestic market increased 7.9% to $3.5 billion whereas international sales increased 12% to $3.5 billion.

New products like Zytiga, Invokana, Stelara, Xarelto, Simponi and Invega Sustenna continued to perform well. Other growth drivers included Prezista, Remicade and Velcade. Third quarter Zytiga sales were $464 million, up 75.1% year-over-year. Launch in additional countries and the label expansion for use in chemo-naïve patients should continue driving sales.

The Consumer segment recorded revenues of $3.6 billion in the reported quarter, up 0.8% from the third quarter of 2012. Foreign currency movement negatively impacted sales in the segment by 1.2%. Sales in the domestic market grew 0.9% year-over-year to $1.2 billion, whereas the international market recorded year-over-year growth of 0.8%. OTC sales increased 17.9% in the U.S. with some key products being re-launched. Johnson & Johnson intends to deliver reliable and consistent supply of 75% of the product brands by year end.

Ups Earnings Guidance Again

With Johnson & Johnson’s third quarter earnings surpassing expectations, the company raised its 2013 earnings guidance again to $5.44 - $5.49 per share. The company was previously expecting earnings of $5.40 - $5.47 per share. The Zacks Consensus Estimate currently stands at $5.47, towards the higher end of the new guidance range. Shares were up in pre-market trading.

Johnson & Johnson currently carries a Zacks Rank #3 (Hold). Once again, the strong performance of the Pharmaceutical segment helped offset the decline in sales in the Medical Devices & Diagnostics segment. Johnson & Johnson has been trying to offset the declining sales of some of its important products by bringing in new products through in-licensing deals and acquisitions. We believe the diversity and strength of the company’s underlying businesses will continue to provide strong growth in future.

While we expect Johnson & Johnson to continue facing headwinds in the form of EU pricing pressure and manufacturing issues, we believe Johnson & Johnson’s diversified business model, lack of cyclicality and strong financial position will continue helping the company pave its way through tough situations.

Currently, large-cap pharma stocks like Roche (RHHBY), GlaxoSmithKline (GSK) and Bayer (BAYRY) look well-positioned. While Roche is a Zacks Rank #1 (Strong Buy) stock, Bayer and Glaxo are Zacks Rank #2 (Buy) stocks.

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