Day by day (or rather, quarter by quarter) it is getting harder to hang in there with Johnson & Johnson (NYSE: JNJ). I own this one in a retirement account and I have owned it for a while now - during which time it has faithfully spun off dividends, but done little else for me. At some point, I am going to have to consider swapping this out for Abbott Labs (NYSE: ABT) or Roche (Nasdaq: RHHBY) if things do not turn around.
This quarter was textbook mediocre.
Sales growth was sub-1% and the $15.3B total was almost $400M below the average guess (though that's pretty close given the scale). Pharma was okay - up 1% to $5.6B. Consumer was not - down almost 7% in constant currency. Devices was in the middle - up 4% (I say "in the middle" because I expected more of devices and less of pharma). What bothers me about devices, though, is that nothing looked very good - Ethicon and DePuy did not look good, and clinical diagnostics was pretty iffy too.
Going down the line, earnings quality was not so hot - gross margins were down and the company needed a lower tax rate to pick up some incremental earnings power. All in all, EPS of 1.21 was in-line.
Along with these earnings, the company also cut guidance by about $0.15 due to for-ex and the recalls in the Consumer business. Okay, a few pennies here or there in the for-ex pot does not bother me, but I am frankly surprised at the magnitude of the revision due to the recall. I guess that the company is going to have to write down a lot more inventory than I thought and the cost of getting those plants back in order is likewise steeper than I surmised. Of course, some of this could also be due to anticipated revenue/margins decline from the perception hit that the business is taking.
All in all, this is another frustrating and lackluster report.
What makes matters worse is that there is no quick fix. JNJ is so large that it is like moving a supertanker. So even though I like the acquisition of Micrus Endovascular (Nasdaq: MEND), that is not going to single-handedly reverse the fortunes of the device segment. Likewise, unless the company can come up with a true new blockbuster drug, the Pharma business is not going to change quickly.
All that said, I would like to see the company get more active. They should be signing early-stage partnerships and in-licensing biotech compounds (I would especially like to see them get involved in siRNA drugs). They should also be aggressively pursuing early stage medical technology companies and bringing prospectively high-growth technologies in house (this is the model that Medtronic has used quite successfully). None of that would help today, or even next year, but it would make investors feel a bit better about the future.
I hold JNJ largely because it seemed like valuation was baking in pretty much pathetically flat performance, and I thought the company would be able to surpass that. Perhaps I was wrong - maybe 1% growth is all that this company can do under present management. I do not really believe that (yet), but I have to at least incorporate that into my scenario analysis.
I just do not know. I am going to continue to hold JNJ for the time being, but I have to say that I am looking more and more at supplementing or replacing it with names like Abbott, Roche, Bard (NYSE: BCR), Becton Dickinson (NYSE: BDX) and so on. I am doing this to make money, afterall.
Disclosure - I own shares of JNJ.
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