Johnson & Johnson Leaves Investors With Questions

Shares of Johnson & Johnson NYSE: JNJ were under pressure on Wednesday after the company released their Q4 results that left investors with more questions than answers. A small beat on analyst expectations for their EPS was marred by a miss on the consensus for revenue which registered less than 2% growth year on year.

The release came before the bell and shares gapped down about 2% from Tuesday’s close on the open. As the numbers were digested on Wall Street during the session, shares were able to catch a small bid that only left them down about 0.7% on the day by the close.

CEO Alex Gorsky said with the release, “we delivered strong underlying sales and earnings growth in 2019, driven by the strength of our Pharmaceutical business, accelerating performance in our Medical Devices business and improved profitability in our Consumer business. As we enter into 2020 and this next decade, our strategic investments focused on advancing our pipelines and driving innovation across our entire product portfolio, position us well to deliver long-term sustainable growth and value to our shareholders."

Rocked by Scandals

Still, for all his positivity, the ticker tape is saying this was a disappointing earnings report for a company whose share price promised much more. Over the past 2 months, the stock of the world’s largest healthcare company had rallied 15% and was setting fresh all-time highs on Tuesday as investors bought in thinking Wednesday’s report would be a knockout. This latest rally came after what was a very choppy year for the stock as the company was rocked by scandals. The stock had traded at these levels back towards the end of 2018 before shedding almost 20% of its value in a week as the now infamous baby powder - asbestos story started gathering pace.

Coming into this week, investors would have been starting to feel like this and other scandals were behind them as after months of denials and investigations the stock traded hands at fresh highs. Earlier this month a Philadelphia judge had reduced the amount of punitive damages the company was initially due to pay for its role in the Risperdal lawsuit. What was originally $8 billion owed in damages is now a much more palatable $7 million.

However, according to the New York Times last October, the company faces more than 100,000 lawsuits over its products. It may be a while yet before investors can breathe easy without the fear of mammoth legal costs. On the bright side, Tuesday's report showed that litigation expenses were $264 million for last quarter which is much improved on the staggering $1.3 billion for the same quarter last year.

Decent Internal Momentum

To be sure though, looking internally at the numbers this wasn’t a bad earnings report by any measure. EPS was still up 34% year on year and net income grew 32% over the same time period. EPS was up about 25% year on year in the company’s last earnings report in October so there’s definitely internal momentum. Declining drug sales due to growing competition hurt the company’s revenue streams, particularly for Zytiga, their prostate cancer treatment whose sales were down 14% and Remicade, their anti-inflammatory injection who saw their sales fall 16%. Competition aside, sales of the company’s baby care products fell 11% as the fallout from the asbestos and baby talc scandal continues to hurt the company’s pockets.

The fact that revenue was able to grow at all is down to their newer treatments stepping up to the plate. Stelara sales surged almost 18% year on year while Tremfya sales jumped over 50% in the same time. Alongside these impressive numbers, combined sales from their blood cancer treatments, Darzalex and Imbruvica, rose 33%.

Investors will have to ask themselves if this a $390 billion company is a good value at these levels simply because it can blow sales out of the water on new products before the competition comes in. It’s worth noting that there are some more attractive healthcare names out there, who carry less baggage and have more of a spring in their step post-earnings.

That said, JNJ isn’t going anywhere and with its ability to drive sales in new products it is intent on remaining at the front of the pack. If management can start to finally put the asbestos story behind them in the coming months, the stock should be able to confidently kick on to the fresh all-time highs it clearly wants to see.