Following the release of fourth quarter and fiscal year 2010 results on January 25, 2011, almost all the analysts covering Johnson & Johnson (JNJ) revised their earnings estimates downward for 2011. The earnings for 2012 also saw half the analysts making downside revisions. The negative sentiment among analysts is primarily in response to the company’s dismal guidance for fiscal 2011 and the OTC product recall.
Fourth Quarter Recap
Johnson & Johnson reported fourth quarter earnings of $1.03 per share (excluding special items), in line with the Zacks Consensus Estimate and a penny above the year-ago earnings of $1.02 per share.
Revenues for the quarter declined 5.5% year over year to $15.6 billion, falling short of the Zacks Consensus Estimate of $15.9 billion. While operational factors brought down sales by 5.1%, foreign exchange movement negatively impacted sales by 0.4%. Although sales in the domestic market dropped 4.7%, sales in the international markets increased 3.6%.
Detailed discussion of fourth quarter and full year 2010 results is available here.
Agreement of Analysts
Following the release of fourth quarter results, estimate revision trends among the analysts depict a clear negative bias for the company’s earnings in the forthcoming period. Over the last 30 days, 3 analysts covering the stock have made downward revisions for the next quarter, with estimates for fiscal 2010 and fiscal 2011 being lowered by 15 and 7 analysts, respectively.
Upward revisions over the last 30 days have been few, with only one analyst increasing estimates for the next quarter as well as for fiscal 2011. No analyst increased estimates for fiscal 2012.
The downward revision in estimates is not surprising considering the disappointing 2011 outlook provided by the company. Johnson & Johnson expects 2011 earnings in the range of $4.80 to $4.90 per share, on 2-3% sales growth. The guidance, which includes the impact of the company’s deal with Watson Pharmaceuticals Inc. (WPI) for Concerta and the genericization of Levaquin in June 2011, was well below analyst expectations.
The poor performance of Johnson & Johnson’s Consumer segment due to back-to-back OTC product recalls, EU pricing pressure as well as genericization of certain products are likely to weigh on sales.
Consumer segment sales declined 7.7% in 2010 to $14.6 billion with OTC/nutritional sales declining 19.2%. The product recall and the suspension of manufacturing at McNeil’s Fort Washington plant resulted in a $900 million negative impact on 2010 revenues. Although the company has started shipping one of the recalled products, we believe the company will not be in a position to resume normal supply of all the recalled products before late 2011. Meanwhile, the Fort Washington plant, which has been shut down, is not expected to be operational until late 2011.
Magnitude of Estimate Revisions
The magnitude of revisions, given the clear downward trend in analyst sentiment, is significant. Overall, estimates for the next quarter have gone down by 4 cents. A similar trend can be seen for 2010 and 2011, with estimates going down by 15 cents ($4.84) and 23 cents ($5.12), respectively, over the last 30 days.
Considering the estimate revision trends and the magnitude of revisions, we find that there is a clear negative outlook in the near term. However, we believe Johnson & Johnson’s diversified business model, lack of cyclicality, robust pipeline and strong financial position will help the company negotiate the tough times.
Johnson & Johnson has been trying to counter declining sales of some of its important products by bringing in new ones through in-licensing deals and acquisitions. We currently have a Neutral recommendation on the stock.