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Johnson & Johnson (JNJ) Up 5.3% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Johnson & Johnson (JNJ). Shares have added about 5.3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Johnson & Johnson due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Beats on Q3 Earnings, Cuts 2022 Sales View on Fx Woes

J&J’s third-quarter 2022 earnings came in at $2.55 per share, which beat the Zacks Consensus Estimate of $2.49. Earnings declined 1.9% from the year-ago period. Earnings slightly missed our estimates of $2.57 per share.

Adjusted earnings exclude intangible amortization and some other special items. Including these items, J&J reported third-quarter earnings of $1.68 per share, up 22.6% from the year-ago quarter.

Sales came in at $23.8 billion, which marginally beat the Zacks Consensus Estimate of $23.28 billion as well as our estimates of $23.64 billion. Sales rose 1.9% from the year-ago quarter, reflecting an operational increase of 8.1% and a negative currency impact of 6.2%.

Organically, excluding the impact of acquisitions and divestitures, sales rose 8.2% on an operational basis compared with an 8.1% increase in the previous quarter.

Third-quarter sales in the domestic market rose 4.1% to $12.45 billion. International sales declined 0.3% on a reported basis to $11.3 billion, reflecting an operational increase of 12.3%, which was more than offset by a negative currency impact of 12.6%. Excluding the impact of all acquisitions and divestitures, on an adjusted operational basis, international sales rose 12.4% in the quarter.

In the quarter, J&J accelerated operational sales growth across all three segments despite macroeconomic pressure.

Its Pharmaceuticals unit sales continued to post above-market adjusted operational sales growth despite the negative currency impact. Sales also improved in the MedTech and Consumer segments.

Segment Details

Pharmaceutical segment sales rose 2.6% year over year to $13.21 billion, reflecting 9% operational growth and a 6.4% negative currency impact. Excluding the impact of all acquisitions and divestitures and currency, on an adjusted operational basis, worldwide sales rose 9.2%. Pharmaceutical segment sales exceeded our estimates of $13.16 billion as well as the Zacks Consensus Estimate of $13.09 billion.

Sales in the domestic market rose 3% to $7.44 billion. International sales rose 2% to $6.78 billion (operational increase of 16.7%).

The year-over-year sales increase was led by higher penetration and new indications across key products, such as Darzalex and Stelara. Other core products like Invega Sustenna and relatively newer drugs, Erleada and Tremfya contributed significantly to sales growth. Sales of J&J’s single-dose COVID-19 vaccine was less than in the previous quarter. The sales growth was also dampened by lower sales of key medicine, Imbruvica and generic/biosimilar competition to drugs like Zytiga and Remicade.

Darzalex sales rose 29.8% year over year to $2.05 billion in the quarter, which matched our estimates.

Stelara sales grew 3% to $2.45 billion in the quarter, driven by strong market growth and share gains in Crohn's disease and ulcerative colitis, partially offset by an unfavorable prior period adjustment. Stelara sales were slightly less than our estimate of $2.63 billion.

Imbruvica sales declined 14.6% to $911 million due to increased competitive pressure in the United States from novel oral agents. Imbruvica sales also missed our estimates of $952.8 million. While below pre-COVID levels in CLL market hurt sales in the United States, government clawbacks hurt sales in Europe.
 
PAH revenues of $852 million declined 1.9% year over year. Invega Sustenna/Xeplion/Invega Trinza/Trevicta sales rose 2.6% to $1.03 billion in the quarter. Simponi/Simponi Aria sales declined 4.6% to $545 million, while Prezista sales decreased 6.4% to $485 million.  

Xarelto sales rose 8.4% in the quarter to $689 million while sales of Invokana/Invokamet declined 18.4% to $109 million.

Among the newer medicines, Erleada generated sales of $490 million in the quarter, up 42.2% year over year. Tremfya recorded sales of $729 million in the quarter, up 35.9% year over year driven by share gains in psoriasis and psoriatic arthritis indications.

Zytiga sales declined 16.7% to $456 million in the quarter due to generic competition. Zytiga lost exclusivity in EMEA markets in September, which is likely to hurt sales further in the fourth quarter. Sales of Remicade were down 26.6% in the quarter to $558 million.

J&J’s single-dose COVID-19 vaccine generated sales of $489 million in the third quarter compared with $544 million in the second quarter. International sales accounted for all the COVID-19 vaccine sales. We expected COVID-19 vaccine sales of $224.3 million for the third quarter.

Excluding COVID-19 vaccine, sales in the Pharmaceutical segment rose 2.8%, as an operational increase of 8.9% was offset by a negative currency movement of 6.1%.

J&J continues to expect its Pharmaceutical business to deliver market-leading adjusted operational sales growth in 2023 despite the Stelara loss of exclusivity in the second half in the United States.

The MedTech segment sales came in at $6.78 billion, up 2.1% from the year-ago period, as an operational increase of 8.1% was offset by a negative currency movement of 6.0%. The MedTech segment sales were in line with our as well as the Zacks Consensus Estimate of $6.78 billion.

Excluding the impact of all acquisitions and divestitures and currency, on an adjusted operational basis, worldwide sales rose 8.1%.

Sales in the MedTech segment continued to improve, driven by a recovery in surgical procedures, better commercial execution and new product launches. However, sales were partly hurt by volume-based procurement (VBP) issues in China and unfavorable timing of international tenders, primarily in orthopedics and supply constraints.

Interventional Solutions grew 10.8% driven by electrophysiology products. In Surgery, Advanced Surgery declined 1.2% worldwide. General Surgery rose 0.3% worldwide. Worldwide orthopedics rose 0.1%.  Worldwide Vision grew 1.4%, driven by the strong performance of contact lenses.

Domestic market sales rose 7.7% year over year to $3.36 billion. International market sales declined 2.9% year over year to $3.43 billion, which included an operational increase of 8.5% and a negative currency impact of 11.4%.

In the MedTech segment, J&J expects continued recovery in worldwide procedure volumes, better execution and uptake from recently launched products to drive sales in 2023. However, the lingering headwinds from hospital staffing and some impact from the VBP program in China are expected to hurt sales in 2023.

The Consumer Health segment recorded revenues of $3.8     billion in the reported quarter, down 0.4% year over year, reflecting a 4.7% operational increase and a 5.1% negative currency impact. Consumer segment sales came ahead of our as well as the Zacks Consensus Estimate of $3.70 billion.

Excluding the impact of all acquisitions and divestitures and currency, on an adjusted operational basis, worldwide sales rose 4.8% worldwide.

The sales growth was driven by strategic price increases, growth in OTC due to a strong cold, cough and flu season and higher international sales in Neutrogena and Aveeno due to market growth and new product launches. This growth was partially offset by supply constraints in the United States (due to raw material availability and labor shortages) and sales suspension of personal care products in Russia.

Sales in the domestic market rose 2.1% from the year-ago period to $1.63 billion. The international segment declined 2.3% to $2.14 billion, which included an operational increase of 6.7% and a negative currency impact of 9.0%.

In the Consumer segment, J&J expects reduction in supply chain disruptions and strategic price increases to benefit results in 2023 although some challenges like inflationary pressure and higher input costs are expected to continue.

2022 Outlook

J&J lowered its sales expectations for 2022 mainly due to currency headwinds. It also tightened its adjusted earnings guidance range.

J&J expects to generate revenues in the range of $93.0 billion to $93.5 billion, lower than the previous expectation of $93.3 billion to $94.3 billion. This guidance excludes any revenues from J&J’s COVID-19 vaccine. Revenue growth is expected in the range of 1.8%-2.3% compared with 2.1%-3.1%, expected previously.

Excluding the COVID-19 vaccine, operational constant-currency sales are expected to increase in the range of 6.7%-7.2% compared with 6.5%-7.5% expected previously.

The adjusted operational sales (excluding currency impact, acquisitions/divestitures) growth guidance is the same as the operational constant-currency sales discussed above.

The adjusted earnings per share guidance was tightened from a range of $10.00-$10.10 per share to $10.02-$10.07 per share. Adjusted EPS is expected to be negatively impacted by approximately 68 cents per share due to currency headwinds. The earnings range indicates an increase of 2.3%-2.8%, compared with 2.1%-3.1% expected previously. On an operational, constant-currency basis, adjusted earnings per share are expected to increase 9.2% – 9.7% versus the prior expectation of 8.7% – 9.7%

Operating margins are expected to decline 50 bps from 2021 levels versus the prior expectation of remaining flat due to the impact of inflationary pressure. In 2023, management expects currency headwinds and the KenVue Consumer Health separation to put pressure on operating margins.  J&J expects supply constraints, inflationary pressure and rising input costs to continue to hurt margins in the second half of 2022 as well as in 2023

Other income is expected to be in the range of $1.7 billion to $1.8 billion versus the prior expectation of $1.4 billion to $1.5 billion. Adjusted tax rate guidance was maintained in the range of 15.0% to 15.5%.

Management expects an unfavorable currency impact of $4.5 billion on revenues and 68 cents on adjusted EPS in 2022. In 2023, the negative currency impact is expected to be 40-45 cents on adjusted EPS, 10 cents more than the prior expectation of 30-35 cents.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

At this time, Johnson & Johnson has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Johnson & Johnson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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