Johnson & Johnson (JNJ) is slated to report its third quarter 2010 earnings on Oct. 19, 2010. The current Zacks Consensus Estimate for the third quarter is $1.15 per share, representing a year-over-year decline of 4.3%.
Johnson & Johnson has surpassed earnings estimates in three of the last four quarters and reported in line with the Zacks Consensus Estimate in the second quarter of 2010 (with a trailing four-quarter average of 4.30%). The company is expected to deliver an in-line performance in the third quarter as well.
Second Quarter Recap
Johnson & Johnson’s second-quarter 2010 earnings (excluding special items) of $1.21 per share was in line with the Zacks Consensus Estimate, but 5.2% above the year-ago earnings. Including an after-tax gain of $67 million arising from litigation, earnings for the second quarter came in at $1.23.
The company’s revenues for the second quarter increased 0.6% year-over-year to $15.3 billion. Operational factors and foreign exchange movement had a positive impact of 0.1% and 0.5%, respectively on sales in the quarter. Although sales in the domestic market came down by 2.8%, sales in international markets increased 4.1%.
While operational factors brought down sales by 0.1%, foreign exchange movement had a positive impact of 4.1%. Meanwhile, sales in the domestic market declined 5%, with sales from international markets increasing 14.4%.
The Medical Devices and Diagnostics segment continued its impressive performance and posted higher revenues than the Pharmaceuticals segment. This segment generated revenues of $6,227 million, an increase of 12.5% from the year-ago period.
Both operational factors and foreign exchange movement contributed to this growth by 3.5% and 0.6%, respectively. Sales in the domestic and international market increased 3.2% to $2,865 million and 5.0% to $3,265 million, respectively. The Consumer segment recorded revenues of $3,647 million in the reported quarter, down 5.4% from the year ago quarter.
Following the release of second quarter results, Johnson & Johnson lowered its guidance for 2010 to reflect the impact of over-the-counter (OTC) product recall and pricing pressure in the European Union (EU). The company expects EPS in the range of $4.65 – $4.75.
Agreement of Analysts
Estimate revisions for Johnson & Johnson have been more or less non-existent over the past week and month. Over the past 30 days, only 1 of the 18 analysts covering the stock has reduced estimates for the third quarter, with no movement in the opposite direction. 2010 estimates have been revised downward by 2 of the 23 analysts following the stock with 1 movement in the opposite direction. Negligible movement has been witnessed over the last 7 days as well.
We believe that the minimal estimate revisions witnessed reflect the diminishing concerns about Johnson & Johnson’s over-the-counter product recall and pricing pressures seen in the EU.
Even though we remain concerned about these headwinds, we believe the company is taking measures to counter falling sales of key products through in-licensing deals and acquisitions that would bring new products to market. The diversity and strength of the company’s businesses should ensure strong growth ahead.
Magnitude of Estimate Revisions
Estimates for the third quarter of 2010 and fiscal 2010 have remained static over the last 30 days due to the lack of significant estimate revisions by the analysts following the stock. The current Zacks Consensus Estimate for the third quarter and fiscal 2010 are $1.15 and $4.70, respectively.
Neutral on Johnson & Johnson
We currently have a Neutral recommendation on Johnson & Johnson with a Zacks #3 Rank (short-term Hold recommendation). The short-term stance indicates that the stock is expected to perform in line with the overall US equity market for the next 1-3 months.
Our long-term Neutral recommendation on the stock is based on the belief that Johnson and Johnson’s diversified business model, lack of cyclicality and strong financial position will help it in tough situations. Moreover, Johnson & Johnson has been entering deals, which should help boost its revenues in the long-term.
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