JNJ reported strong Q3 2017 results with a beat and raise on top and bottom lines. Sales came in nearly $360M above estimates and cash EPS of $1.90 was 13% ahead of street estimates. Solid performance was driven mostly by better than expected results in pharmaceuticals. Excluding the impact of acquisitions and divestitures and forex, worldwide sales were up 3.8%. Price Target remains unchanged.
Current Price: $139.20 Price Target: $146 Current Price: $139.20 Price Target: $146 Position size: 3% TTM Performance: +20.6%
Thesis intact. Key takeaways:
1. 3Q17 revenue: +3.8% excluding acquisitions and divestitures; total operational sales increase of 9.7% in the U.S., 7.9% in Europe, and 10.6% in Asia-Pac/Africaa) Pharma (49% of sales): sales were +6.7% ex-FX, strength in oncology (+23.8%) but largest weakness in Infectious Diseases (-5.3%); Remicade maintains strong sales but slowly losing modest market share to Pfizer’s Inflectra b) Medical devices (34% of sales): sales +1.2% ex-FX, led by cardiovascular sales (+12.5%) and vision care (+48.4% due to AMO acquisition); diabetes device sales down -6.9%c) Consumer (17% of sales): sales growth +1.1% ex-FX, helped by Tylenol rapid release gels and beauty product launches in ASPAC and EMEA
2. 2017 guidance moved higher again after increasing H2 2017 expectations earlier this year and beating thema) JNJ maintains operational sales growth expectations of 5.5 – 6.0% for 2017 which may receive a boost from currencyb) Operating margin expectations remain flat to slightly lower vs. 2016, as management now expects higher investment and marketing launches of new productsc) EPS is now guided to $7.25-7.30 (+7.7-8.4% y/y), vs. prior guidance of $7.12-7.22, and consensus expectations of $7.18. d) The ongoing portfolio review suggests there may be more non-strategic businesses to divest 3. JNJ is dedicated to investing in the company’s long term growth. Some important developments in Q3 included:a) Consumer: Divestiture of COMPEED to HRA Pharma was completedb) Pharma: FDA approved additional indication for IMBRUVICA (adult graft-versus-host disease); European Commission approved SYMTUZA (HIV treatment)c) Medical Devices: acquisition of TearScience, Inc. (treatment of Meibomian gland dysfunction) and Sightbox, Inc. (prescription vision care)
4. Valuation: price target remains at $146 (19x 2018 EPS) a) We think the Actelion deal will help JNJ accelerate growth into 2018, and thus deserves to maintain its premium P/E for longerb) FCF yield 4.6% c) Share count was down ~2% y/y this quarter
Thesis on JNJ reiterated:• High quality company with consistent 20% ROE, 4+% FCF yield,• 2% buyback and 2.34% yield totals a 4.3% shareholder return• Investments in the pipeline and moderating patent expirations create a profile for accelerated revenue and earnings growth• Growth opportunity: Medical Devices and Consumer offer sustainable growth and potential for expansion internationally• Strong balance sheet that offers opportunities for M&A.
$JNJ.US