Johnson & Johnson (JNJ) suffered a tough quarter of forex headaches and competitive pressures, and even a guidance hike and new $10 billion share repurchase program make it hard to like JNJ stock.
As the world’s largest maker of healthcare products deriving nearly half its revenue from overseas, JNJ is especially vulnerable to a rising dollar, and the greenback showed the company no mercy. JNJ said currency effects cut revenue by 8.2%.
But JNJ can’t blame all of its problems on global macroeconomic woes. In another blow, some of its blockbusters drugs stumbled badly in the face of new competition.
Overseas sales of Remicade — JNJ’s best-selling drug — tumbled by nearly a third year-over-year after competitors launched biosimilar copycats. (Biosimilars are essentially generic versions of biotech drugs.)
And sales of once high-flying hepatitis C drug Olysio all but vanished. Revenue from the medication fell to $79 million from $796 million after competitors debuted superior medications.
As depressing as all that may sound, JNJ did manage to beat Wall Street’s profit estimate, raised its outlook and pledged to lavish yet more cash on shareholders.
But even those positives come with strings attached. The profit beat was largely a function of taxes, and giving money to shareholders makes it harder to address fundamental problems in the pharmaceuticals segment.
Indeed, $10 billion in cash might be better spent on an acquisition in the merger-happy healthcare sector. After all, JNJ’s pipeline is under assault from patent expirations and rival drugs.
JNJ Earnings Top Estimates, Market Shrugs
For the most recent quarter, JNJ earnings came to $3.36 billion, or $1.20 a share, vs. $4.75 billion, or $1.66 a share, a year earlier. On an adjusted basis — which is what analysts care about — JNJ earned $1.49 a share. That beat the Street’s average estimate of $1.45 a share.
Revenue fell 7.4% to $17.1 billion in the quarter, missing analysts’ forecast for $17.45 billion. Were it not for the strong dollar, the top line would have increased 0.8%.
For all its problems, a positive tweak to guidance and more stock buybacks helped keep JNJ stock afloat Tuesday.
Johnson & Johnson now targets full-year adjusted earnings at $6.15 to $6.20 a share, up from a prior forecast of $6.10 to $6.20 per share. And, as mentioned above, JNJ also pledged to buy back another $10 billion in stock. The company has already bought back about $5 billion worth of JNJ stock in a program launched last year.
The market doesn’t usually punish stock buybacks, but there’s no question JNJ needs to address its pharmaceuticals business. Another share buyback — funded by debt — makes a splashy deal look less likely, and that’s a reason to give this bit of financial engineering a thumbs down.
There’s a reason that JNJ stock is lagging the broader market by a wide margin (off 9% for the year-to-date) in a year when healthcare stocks are broadly higher.
JNJ has too many macro and company-specific headwinds to call it a bargain these days. Sure, it remains a long-term hold for value players and retirement portfolios (it’s JNJ, after all), but new money need not apply.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
