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Strong Dollar Likely Not So Healthy for J&J Earnings

July 10, 2015

Get used to “blame the dollar” this earnings round. The strong buck’s stranglehold on the profits that multinationals derive from their overseas markets has crimped earnings, and Johnson & Johnson (JNJ), with its big global footprint, is likely no exception.

JNJ is due to report its Q2 results, followed by a conference call, on Tuesday morning, July 14.

Dividend-paying Johnson & Johnson operates 265 companies engaged in the research and development, manufacture, and sale of health care and consumer products. Its brands include Tylenol and allergy drug Zyrtec. And it increasingly competes, with Merck (MRK) and others, in areas including immune system development. Roughly half of Johnson & Johnson's revenue comes from overseas markets.

Exposure Abroad

Wall Street analysts’ average estimate pegs JNJ’s Q2 sales at $17.8 billion and earnings per share (EPS) at $1.69. If realized, that marks a drop of 9% and 5%, respectively, from what JNJ reported in Q2 a year earlier. And, because most analysts are generally optimistic for JNJ’s product mix and research possibilities, currency impact is likely the biggest culprit.

Notably, analysts may be used to pricing in currency effects and more. Meaning, they seem to have marked down expectations due to the dollar and other factors accordingly. As such, JNJ results have not missed Street estimates since Q4 2011.

And Moving Ahead?

Ahead of the Q2 release, Street analysts expect full-year 2015 sales of $70.6 billion for JNJ, with earnings per share of $6.14.

Traders are likely most interested in the conference call that could affirm or dismantle that full-year outlook. Listeners will be especially sensitive to continued currency talk, but will want executives to separate foreign exchange impact from what’s happening in the pipeline.

We’ve only tiptoed into this earnings season but already revenue is the important measure. Revenue, after all, will help us paint the picture of global economic health. Investors know that companies and analysts have lowered revenue expectations given global growth bumps, but surprisingly upbeat revenue news is still heartily embraced.

Even with the strong-dollar burden, JNJ has largely weathered the dent on overseas profits, slowing MedTech utilization trends, competitive price pressures, and major pharma patent expirations, Street analysts have noted. But Wells Fargo analysts, for one, stress potential outperformance among several of JNJ’s key U.S. drugs, offset by weaker-than-expected Olysio sales.

JNJ trades at 17x earnings compared to the average S&P 500 price/earnings ratio of 21x. JNJ shares are down some 5% so far in 2015 and down 6.5% over the past year, lagging the broader health care sector and the S&P 500’s some 5% gain over the past 12 months.

Also interesting, the latest installment of the TD Ameritrade Investor Movement Index® (IMXSM), showed demand for JNJ shares from a sample of TD Ameritrade’s 6 million funded client accounts. Surveyed clients said they wanted JNJ at that time for its dividend yield. That’s a potential sign that bond market volatility has pushed some investors into the blue-chip dividend payers.

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