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Earnings: Will JNJ Reveal Pipeline Challenges or Beat Again?

January 25, 2016
Earnings: Will JNJ Reveal Pipeline Challenges or Beat Again?

Johnson & Johnson (JNJ)—the diversified health care giant with identifiable brands like Band-Aids, Tylenol, and more crowding most consumer cabinets—will be among the first of its sector to report earnings this go-around. Its release, due ahead of the market open on Tuesday, could offer a glimpse into what could be expected from the industry.

Brand recognition is one thing, but it might surprise some investors to learn that consumer products represent a much smaller slice of total revenue than pharmaceuticals and medical devices and diagnostics, according to industry analysts citing JNJ data. Consumer product sales at $14.5 billion in 2014 were less than half of the some $32 billion pulled in from pharma sales that span immunology and infectious diseases to oncology and metabolism.

On average, analysts reporting to Thomson Reuters are looking for earnings of $1.42 a share on top-line sales of $17.9 billion. That’s up 3.6% on a per-share basis, but about a 1.9% decline in revenues.

JNJ is among the large-cap health care stocks, including Eli Lilly (LLY), Pfizer (PFE), and Bristol-Myers Squibb (BMY), that may face sector challenges and select shining moments in the coming year.

According to Credit Suisse analyst Vamil Divan, "Positive product news as well as continued M&A/business development may provide opportunities for upside, although we believe this may be balanced out by fewer impactful pipeline readings in 1H 2016 and increasing payer pressure and public debates around drug prices through the US Presidential Election cycle.”

Charges Detailed

Early last week, JNJ said it would slash 3,000 jobs in its medical-devices division, a recuperative measure for a business that is struggling worldwide with changes in health-care systems, it said.

The step will dent the bottom line, the company also said. JNJ will book $2 billion to $2.4 billion in total related charges that started with a restructuring charge of $600 million in Q4. But if that figure and other special items are excluded, JNJ expects its 2015 full-year forecast to remain intact.

In October, JNJ said it would buy back $10 billion worth of shares, which Street analysts say is still in the works despite the charges. They note that JNJ ended the last quarter with $37 billion in cash.

Currency fluctuations are always a potential problem for multinationals when the dollar is as strong as it’s been. Count JNJ in that boat. However, industry analysts point out that 50% of its sales are derived from the U.S., a potential cushion.

Industry analysts are also interested in what the company says about its merger-and-acquisition plans. Is JNJ looking for one big buy or smaller add-ons?

JNJ stock chart


Johnson & Johnson (JNJ) has moved largely in step with the broader market so far in 2016. Could earnings set it on a different path? If history is any indication, JNJ’s past 12 straight quarters of beating Street expectations may mean something to industry analysts and investors. Chart source: TD Ameritrade’s thinkorswim® platform. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Subdued Reaction?

Unlike many other stocks during this topsy-turvy trading period, JNJ’s volatility is even keel in the middle of the range. Short-term option traders are looking for the earnings news to potentially generate a 2.5% move on the stock in either direction, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator.  

JNJ is not a huge option trading attractor. Notable volume has emerged from call option buyers on the weekly 98 strike. There’s also a put option buyer at the Feb 87 line, which can indicate a trader with a good-sized stock position aiming to put in a downside cap.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

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