Johnson & Johnson: What Happened?

Johnson & Johnson (JNJ) reported fourth quarter earnings on Tuesday beating estimates and making many analysts who were once quite skeptical somewhat excited. However, shortly after the net income and EPS numbers came out, J&J lowered guidance.  This understandably came during tough economic conditions (yes, even for a Healthcare giant like JNJ). Johnson & Johnson did have quite an exciting year, especially in the fourth quarter as they were able to continue their trend of making strategic acquisitions, sweeping up companies engaged in the manufacturing and discovery of niche market products and drugs. That trend will continue through 2009 I believe with the deep valuations that are out in the market, but we’ll get into that a bit later.  Let’s take a look at some of the numbers.

The Earnings

J&J earned $0.97 per share, or $2.71 billion, up from $2.37 billion, or $0.82 per share in the year ago quarter. Excluding charges and gains, J&J earned $0.94 per share, still above analysts polled by Thomson Reuters who estimated earnings of $0.92 per share. The one-time items accounted for in the fourth quarter included a $141 million research charge and $638 million gain in income for favorable settlements of lawsuits and other items. Revenue fell 4.9% to $15.18 billion from $15.96 billion, the first decrease they have seen since the end of 2004. That statistic may startle you because like many, people still believe Healthcare is recession proof, but as seen with the recent GDP Healthcare numbers, prescription drug spending has slowed to its lowest rate in 45  years.  My last article on Healthcare and the Economy has more information on this very important issue. The quarterly revenue drop was led by an 11% decrease in pharmaceutical sales to $5.7 billion, mainly in part due to the 66.5% decrease in sales of Risperdal. Risperdal is JNJ’s schizophrenia drug which suffered from generic competition last June. Similarly other large drugs which have shown the same problems were Razadyne for dementia and Duragesic for pain.

The Consumer segment, acquired from Pfizer a few years back, had sales in the fourth quarter of $3.9 billion, slightly increasing by 1.2% from the same period last year. International sales were up 10.6% and U.S. sales ended up only 1.8%. Many pharmaceutical companies are struggling with their sales in the U.S. but hopefully will see a push forward in upcoming quarters. Regarding the Consumer segment, CEO Bill Weldon noted that they will achieve cost synergies at the higher end of their previously disclosed range of $500 to $600 million by the end of 2009, and even more importantly, this will be adding a steady business unit to their great business model.

If you compare the stock market in 2008 to JNJ’s return, you might be surprised. The Dow Jones Industrial Average (^DJI) and S&P 500 (^GSPC) ended the year down almost 40%, while the Healthcare Spyder which was down about 24%, and Johnson & Johnson finished down only 8%, the third best performer in the Dow for 2008. After third quarter earnings were released, I wrote an article about JNJ and how it still would be a good investment due to their stability.

Going Forward

Johnson & Johnson issued a 2009 forecast for earnings of $4.45 to $4.55 per share, which is below average analyst estimates of $4.61. In this estimate, J&J excludes the $0.03 to $0.05 impact of buying breast implant and cosmetic product maker Mentor Corp., a deal set to close this month. Chief Executive Officer Weldon stated, “I remain optimistic about our ability to adjust to evolving economic conditions,” despite patients faced with economic woes, high unemployment, and even cutting back on essential medical treatments as well as elective surgical procedures. JNJ has strong cash flow which has allowed them to make some acquisitions in order to expand their ever-so large business model. With superb management in place, this trend will continue and the stable returns you have seen will return going forward.

Although the forward looking numbers did disappoint, they were inevitable in this market. It is a fact: Healthcare is not recession proof! There is no recession proof stock/sector in my opinion, but if you continue to invest in companies with long track records of good management, consistent earnings, and good cash flow, you will see consistent returns. Johnson & Johnson has the ability to offer this type consistency.

Disclosure: The mutual fund that the author manages is long JNJ.

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