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When Companies Beat More Than Just Earnings

Sometimes a seemingly bullish conference call is anything but, Cramer said Thursday.

Take Johnson & Johnson and Yum! Brands , for instance, both of which delivered what at first appeared to be better-than-expected quarters. But a closer look showed that the bottom line didn’t tell the whole story.

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JNJ beat the Street by 7 cents a share and upped its 2009 guidance, which was just enough to generate some positive headlines. But it turns out those earnings were a result of decreased research-and-development investment and a lower tax rate – not from a pickup in business.

And at the same time, US sales dropped 8% and the pharmaceuticals division lost 14%. Pharma was “the most noticeable underperformer of the quarter,” Cramer said, and management spent barely any time discussing it on the conference call. Investors who want a drug stock should buy Abbott Labs instead. That company reported a genuine upside surprise on Wednesday, and its earnings are supposed to grow in the low double digits over the next few years, faster than JNJ’s.

Even worse, though, was this statement from Johnson & Johnson’s management: “This year continues to present challenges to certain parts of our business due to the ongoing impact of the economy.” That’s funny, because this is exactly the kind of stock that’s supposed to work regardless of the economy, which is why investors are willing to pay a higher multiple for it. Right now, JNJ trades at 13 times earnings on growth of just 7%.

“After that comment,” Cramer said, “this stock looked a heck of a lot more expensive to me.”

Yum! Brands was just as bad. The company reported a 12-cent earnings beat, generating the same bullish headlines. But, again, that number was driven by a lower tax rate, cheaper commodities and a decline in general and administrative expenses. Sales, which investors want to see driving profits, were disappointing across the globe. In the US, Cramer said, they were “downright awful.”

Just look at the numbers: Same-store sales in China were flat, and they were soft in other places outside the US as well. Here at home, Yum! signature brands – KFC, Taco Bell and Pizza Hut – were down 2%, 2% and 13%, respectively.

And like J&J, Yum!’s management made some pretty negative comments as well: “We now expect the fourth quarter to be the low point of the year for our US business.” The company brass also said that the stock buyback it had been using to buoy the share price would “work against us” in Q4. Oh, and competition is getting tougher, further threatening Yum!’s end-of-year result.

Want to buy a food-and-beverage stock? Go with McDonald’s instead.

It’s a “much better investment,” Cramer said.

Cramer's charitable trust owns Abbott Labs.

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