Thesis intact. Key takeaways:
JNJ reported 1Q18 earnings results that showed the strength and breadth of its portfolio, with good performance in Pharma (Stelara and Zytiga offsetting Remicade deceleration). However, the sales beat was driven by a greater positive FX impact than expected, rather than operational outperformance. The company-wide organic sales growth was 4.3%, a modest acceleration from +4.2% in 4Q17. JNJ’s raised its 2018 operational sales growth guidance by 50bps to 4%-5% and affirmed its EPS guidance of $8.00-$8.20. The management team intends to use the extra cash from the lower tax rate for additional R&D spending. On the call it was clarified however that the pursuit of better organic growth rate will not deter from looking for more M&A targets, as it remains core to its growth strategy. In the next 5 years, the company plans to implement various supply chain actions to reduce complexity and improve cost competitiveness, resulting in $0.06-$0.08B in annual pre-tax savings. These savings will help offset some pricing pressure or internal investments.
· Pharma: organic sales growth was stable from Q4, up 7.5% thanks to recent product launches and acquisitions, helping offset the acceleration in Remicade sales decline due to biosimilar competition and increased discounts/rebates. While Zytiga had great sales, it is facing generic competition either later this year or early 2019.
· Medical Devices: organic sales growth decelerated to 1.1% from 2% in Q4
· Consumer: Increased spending in marketing to support launch of new products seems to have had its impact as organic sales growth accelerated in Q1 (+2%) from Q4 (+0.4%). A baby care product re-launch is scheduled later this year, as performance is not where they want it to be. It is good to see the company taking action, as this segment has seen underwhelming sales levels compared to where it was:
Valuation: no change
- Stock is supported by a ~5% FCF yield and a 2.4% dividend yield
- J&J needs to execute on its recent acquisitions in order to see its P/E multiple expand back to its past 5 years average of 16.5x
Thesis on JNJ reiterated:
- High quality company with consistent 20% ROE, 4+% FCF yield,
- 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.
[tag JNJ]
$JNJ.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
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