Johnson And Johnson Shines, Raises Full-Year Guidance

During a busy day for third quarter earnings, Johnson and Johnson (JNJ) kicked things off this morning (Tuesday) by beating market expectations and sprinting out of the gates up 6% at the open. They reported sales of $15.9 billion up 6.4% from $14.97 billion a year ago and earnings per share of $1.17 per share up 7.6%, excluding an after-tax restructuring charge of $528 million associated with a cost improvement program.  Analysts were expecting sales of $15.7 billion and $1.11 earnings per share.

The team at JNJ proved once again that they are a safe-haven when the markets are flailing.  Net income rising 30% in the third quarter to $3.31 billion compared to $2.55 a year ago highlights this point.  Management also raised their outlook for fiscal 2008, excluding special items, to $4.50-$4.53 from $4.45-$4.50 per share.

J&J operates in three main business segments:

• Consumer Products
• Medical Devices and Diagnostics
• Pharmaceutical Sales

Their personal care items include household names such as Listerine, Neutrogena, Acuvue, Tylenol and enjoyed  worldwide sales of $4.1 billion an increase of 13.1% with domestic sales contributing 11.2% and international rising 14.7%.  JNJ was also helped with the U.S. launch of the allergy medication Zyrtec and continued growth of DABOA, the leading moisturizer in China.

As for their Medical Devices and Diagnostics business, strong sales from the OneTouch Ping, a revolutionary wireless insulin pump, and DePuy, Inc.’s joint replacement and sports medicine and trauma business fueled an 8.8% increase in sales to $5.7 billion from a year ago.  The only low spot for the segment was with lower sales in the Cordis franchise of 6.6% due to more competition in the stent market.

The laggard of the group was Pharmaceuticals with sales of $6.1 billion up a slim 0.2% from last year.  This was mostly due to the favorable dollar exchange rate contributing 2.7% of the rise, while operational growth actually fell 2.5%.  The decline was due in large part to the generic sales of the schizophrenia drug RISPERDAL CONSTA.

What Does this Mean?

Increasing generic competition in their drug sales from Teva Pharmaceutical (TEVA) and Mylan Inc. (MYL) has hurt profits in a big way, and with prescription drugs being JNJ’s core business segment, there is some room for concern.  Generic competition aside, strong growth in consumer products and medical devices have helped JNJ remain positive through the third quarter.  Their dividend is also a bright point with the yield back at an attractive rate of around 3%.

I like management coming out and boosting end-of-the-year numbers because they have continued to grow during the recent market turmoil and have such a trusted set of products, but I would remain cautious going forward until the markets show some real signs of market stability.  Even with their strong numbers posted this morning, the constant pressure on the financial markets and the recent strengthening in the dollar could result in pressure on JNJ’s international markets going forward.

Disclosure: The mutual fund the author is associated with is long JNJ

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