Johnson & Johnson (JNJ) is slated to report second quarter earnings on Jul 20, 2010. The current Zacks Consensus Estimate for the second quarter is $1.21 per share, representing year-over-year growth of 5.2%. Although Johnson & Johnson has consistently surpassed earnings estimates (with a trailing four-quarter average of 3.90%), second quarter earnings are expected to lag expectations by 1.65%.
First Quarter Recap
Johnson & Johnson reported first quarter 2010 earnings per share of $1.29, exceeding the Zacks Consensus Estimate by a couple of cents and the year-earlier earnings of $1.26. Revenues increased 4% to $15.6 billion.
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%.
For the fourth quarter in a row, the Medical Devices & Diagnostics segment 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 (8.1%) and foreign exchange movement (4.4%) contributed to this growth. Consumer segment revenues came in at $3,766 million, up 1.5%.
Following the release of first quarter results, Johnson & Johnson lowered its guidance for 2010 to reflect the impact of changes in foreign currency exchange rates as well as the healthcare reform. For 2010, Johnson & Johnson expects earnings in the range of $4.80 – $4.90.
Agreement of Analysts
Estimate revisions for Johnson & Johnson have shown a downward trend over the past week and month. Over the past 30 days, 8 of the 15 analysts covering the stock have reduced their estimates for the second quarter, with no movement in the opposite direction. For fiscal 2010, 8 of the 21 analysts covering the stock have reduced their estimates with only one analyst moving in the opposite direction. For fiscal 2011, 9 of the 19 analysts covering the stock have reduced their estimates, with only one analyst moving in the opposite direction.
A similar trend was observed over the last 7 days, with 3 analysts reducing their estimates for the second quarter. While 2 and 4 analysts reduced their estimates for fiscal 2010 and 2011, respectively, only one analyst moved in the opposite direction.
The downward estimate revisions reflect the impact of the series of over-the-counter (OTC) product recalls conducted by Johnson & Johnson’s McNeil Consumer Healthcare division over the past few months.
We believe these back-to-back product recalls will adversely affect sales of Johnson & Johnson’s consumer healthcare segment. In fact, some effect of the Jan 2010 OTC product recall was felt in the first quarter performance of the consumer segment, with OTC product sales declining 15% on an operational basis. Sales were affected by the OTC product recall as well as a less severe cold and flu season.
We believe the company will reduce its guidance for 2010 to reflect the impact of the OTC product recall, foreign exchange (Fx) headwind and pricing pressure in the EU.
Magnitude of Estimate Revisions
While estimates for the second quarter of 2010 and fiscal 2010 are down a couple of cents over the last 30 days, estimates for fiscal 2011 are down 3 cents. The current Zacks Consensus Estimate for the second quarter and fiscal 2010 are $1.21 and $4.81, respectively.
Neutral on Johnson & Johnson
We currently have a Neutral recommendation on Johnson & Johnson with a Zacks #4 Rank. The Zacks #4 rank indicates that the stock is expected to underperform the overall U.S. equity market for the next 1-3 months. The OTC product recalls are a setback for Johnson & Johnson and we expect the consumer segment to take a hit in the coming quarters as well. Moreover, the recently enacted U.S. healthcare reform will also impact the company’s results.
Meanwhile, 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 the company pave its way through tough situations. Moreover, Johnson & Johnson has been entering into deals which should help boost its revenues in the long-term.