Key Takeaways:
Current Price: $132 Price Target: $150
Position size: 2.58% 1-Year Performance: +6%
JNJ reported 2Q19 earnings results this morning. Total organic sales were up +3.7% and adjusted EPS up +22.9% ex-FX but including the sale of a business unit. The company is seeing good traction in its Consumer segment which seems to have turned around, growing +2.2%. Pharma was lower than in 1Q but still positive with a +4.4% organic sales growth. Medical Devices had a +3.2% organic sales growth, slightly lower than in 1Q. But the good print can’t erase the risks from the baby talc powder and opioid litigations, which remain a major overhang on the stock. JNJ is awaiting a verdict in the Oklahoma case, and a hearing on talc (July 22) will determine evidentiary standard on 85% of all talc outstanding cases. While JNJ as put money aside for its defense costs ($190M in 2Q19), it hasn’t provisioned any money in the event it loses its defense on talc and opioids, which is a risk for the company. The main risk that we do not see priced in the stock is if they did in fact provide drug compounds to Purdue (the market share leader) as many articles mentioned recently. Although JNJ sold the subsidiary that grew poppy seeds in 2016, a judge could draw the conclusion that JNJ’s market share is actually much higher than 10%, and JNJ should be held responsible to a greater level than currently talk about. We continue to monitor this situation as the risk is tangible.
2019 guidance update:
Organic sales guidance increased by 50bps to 3.5%-3.7% thanks to strong core brands performance and lower sales erosion of Zytiga and Remicade
Adjusted EPS growth unchanged as the company plans to spend more on R&D
Thesis on JNJ reiterated:
- High quality company with consistent 20% ROE, attractive 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