“This is almost a microcosm of everything people are saying; cost cutting and beating on the bottom line is not going to be enough this time and that appears to be what people are thinking about with Johnson & Johnson because the stock just broke under $61 now.

This came, even though the company beat earnings expectations by 7 cents on the bottom line. They came in at $1.20 looking for $1.13. Last quarter, this was enough to get big bumps for all of the market, but if you look at the red line, came in just above expectation and below last year. Part of this was currency, 2.5% was currency. Competition for two big drugs too with Topamax down 7% and Risperdal, an anti-psychotic, down 40% or so.

So we keep hearing that soon are or later, cost cutting is not going to do it and you’re going to need to have some revenue, but nobody was expecting that with Johnson & Johnson this time around. The guidance was increased over the next a couple of years and JNJ narrowed for the full year, but that 7 cent beat, the guidance really just goes in line with what they already did in the third quarter although deals with Elan and Cougar Biotech, there was some dilution they’re eating.” — CNBC’s Squawk on the Street 10/13/2009

Johnson & Johnson (JNJ) is undoubtedly a bellwether stock for both the pharmaceuticals and consumer staples industries.  The company reported EPS of $1.20, or seven cents better than consensus estimates and three cents better than a year ago.  The earnings beat was achieved through further reducing costs and a lower tax rate than anticipated.  Furthermore, the company lifted earnings guidance for the full year to $4.54 to $4.59, while analysts were expecting $4.52.

JNJ Johnson & Johnson is selling off about 3% in early trading because they missed revenue targets.  Analysts wanted to see $15.22 billion in sales for the quarter, but they were only able to produce $15.08.  The biggest weakness was in its drug sales, many of which are facing increased competition from generics.  In addition, growth slowed in some promising newer drugs such as Remicade, which treats arthritis.  They were expected something similar to the 24% growth seen in the second quarter, but instead the drug only grew by 6%.  Prescription drug sales fell 14% to $5.25 billion.  Of course this was the biggest factor that led to the overall 5% decline in sales.

This result continues to support our belief that showing revenue growth will be far more important that beating profit estimates for this quarter.  Less-bad will no longer cut it; especially as companies are comparing to quarters where sales started to considerably weaken a year ago.  We saw the same sort of performance from PepsiCo (PEP) last week, and we expect that many others will see the bar has been raised after the market’s impressive rally.

We are reaffirming our Undervalued stance on Johnson & Johnson, which should come as little surprise considering our view of the company in recent years.  They are experiencing a downturn in its pharmaceutical sales, but the company is attempting to counter that through acquisitions of Elan Corp. and Cougar Biotech recently.  These companies have some potentially exciting drugs in the pipeline, and even though they are dilutive to shareholders, the company is still raising earnings guidance going forward.  This is a generally a good sign that the company is expecting to get make up for the dilution in the very near term.  JNJ still sells for well below its historically established normal valuation ranges of price-to-sales and price-to-cash earnings.  For the long term investor, there are few other companies that offer the combination of stability to protect from the downside and steady upside potential.

Johnson & Johnson Solid Yet Sales Fall