This earnings report may be the straw that breaks the camel's back between me and Johnson & Johnson (NYSE: JNJ). It has been a while since JNJ has really impressed me, and I find that I often end up telling myself "don't worry, it'll get better ... after all, it's JNJ". Well, sometimes once-great companies don't rebound and just continue to fade.
A Quick Run Through The Numbers
JNJ reported that revenue fell more than 5% this quarter, missing the average estimate and actually coming in below the lowest published estimate. Consumer was the worst performer of all, as sales fell 15%. Within that, woundcare was down 16% and OTC was absolutely crushed (sales down almost 31%) by the never-ending series of recalls. Pharmaceutical sales were down almost 5% and there were almost no signs of life in the segment, with only Prezista showing any meaningful growth.
Devices were ironically the best story this quarter, as sales rose 0.2%. Cordis (drug-coated stents) was weak yet again though, and sales fell 10%. Orthopedic sales (DePuy) were also down (2%), and so was diabetes (down 2%). Ethicon was up 4% and diagnostics grew 7%.
Oddly enough, gross margins were stable this quarter and that's pretty good considering that the company should have seen operational de-leveraging. Moreover, operating margin actually expanded by 1.5%, but almost half of that was from lower R&D spending. I do NOT like to see health care companies cutting their R&D budgets, but even moreso when their current revenue trajectory and near-term pipeline are uninspiring. At the bottom line, earnings were down 12%
This And That
It annoys me that JNJ does not provide a cash flow statement with its earnings. If other equally large and diverse conglomerates can do so, what is their excuse? I frankly find it dismissive and disrespectful to investors, but I don't expect that they will change. Nevertheless, it means I cannot immediately re-run a DCF analysis on JNJ shares, but I cannot imagine it will be better than my last run-through.
I also take issue with the company's strategy. JNJ overpaid for Crucell; vaccines can be a great business, but Crucell is not going to help the company much in the short-term. And if JNJ did make a bid for Smith & Nephew (NYSE: SNN), it's just another sign (to me, at least) that JNJ cannot compete on the basis of its own internal R&D efforts. What next, a bidding war for Beckman Coulter (NYSE: BEC)? And then there's the whole mess in Consumer ... though I believe management has actually started handling that better and that's on the way to resolution.
The Bottom Line
On the basis of my last valuation run, JNJ shares are worth about $71.50 - about 15% higher than where the stock will open today. If JNJ were executing well and giving my confidence in management's abilities and direction, I wouldn't mind that relatively low appreciation potential.
But JNJ is *NOT* executing well, and I cannot see any immediately obvious reasons to think that will change anytime soon. Consequently, I think I will be selling these shares. I'd frankly rather pay up for Abbott (NYSE: ABT) or Becton Dickinson (NYSE: BDX) than own JNJ, and if I was going to own a troubled health care company that needed some TLC, why not own Roche (Nasdaq: RHHBY) instead? Obviously, I'm annoyed as I write this, so I need to let the emotion fade a bit and then decide how to proceed. At this point, though, I'm thinking it's time to move on from JNJ.
At this point, I would probably SELL (though not short) JNJ shares.
Disclosure: I own shares of JNJ
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