Johnson & Johnson (NYSE: JNJ) seems to be making a habit of the "miss on the top, beat on the bottom" earnings report. While I am somewhat pleased to see the company finding new levers to pull for profitability, the absence of top-line growth is a festering long-term issue.
Overall revenue dropped about 1% to $15B - a touch below the consensus guess of $15.2B. The details, though, are interesting.
Consumer sales fell sharply, down almost 11%, as the company really suffered for those recalls and manufacturing suspensions. Pharmaceutical sales, though, were pretty strong at nearly 5% growth. Performance in devices was mostly mediocre-to-negative, with just 1% growth.
Below the top line, nothing really changed all that much from last year. The gross margin went down a bit (likely because of those manufacturing problems and recalls), and the company spent more on R&D, but also got a benefit from "other" income. All in all, pre-tax profitability was unchanged as a percentage of sales.
Looking again at consumer health, every single category was down except for Baby Care, and the overall U.S. consumer business was down almost 25% - a pretty stunning drop for a profitable and well-known business. It looks like management really has its work cut out for itself in fixing this business, and I'm not sure they're up to the challenge (repair-work usually takes some amount of dynamism and that seems to be outside the skill-set of this team).
Nothing really jumped out about the performance of the pharmaceutical business, but I was surprised to see just how weak Cordis was within devices. I realize Abbott (NYSE: ABT) has left JNJ in the dust with drug-coated stents, but I had expected a bit more stability. Orthopedics eaked out a gain, while the diabetes business fell. All in all, a mediocre performance.
So, what about this stock? It still seems cheap relative to its cash-generation potential ... but not so cheap as to be compelling. I'm ratcheting down my free cash flow growth expectations to the 2-3% range, due entirely to lower revenue growth in the future. That translates into about 10% upside exclusive of the nice dividend and ongoing buybacks.
If you're willing to assume that JNJ can grow the top line at 4% a year, the valuation goes up to about $80 a share. Maybe the drug and device pipeline support that, but I'm not as confident in that outlook anymore.Still, I would not sell this one today, so I will settle for being a grouchy owner.
Disclosure - I own shares of JNJ
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