As earnings season intensifies, so will scrutiny over Johnson & Johnson when it reports results on Tuesday.
There will, of course, be the surface view of the numbers themselves. Consensus estimates are for a profit of $1.15 a share on close to $15.2 billion in revenue.
That would be a year-over-year decline in earnings per share and only slight growth on the revenue side.
Despite the headwinds, the analyst community thinks there's room for a surprise to the upside, mainly because expectations have fallen quite a bit.
"What's good about this quarter compared to last quarter is that the bar is a lot lower," said Citicorp analyst Matthew Dodds.
If you are interested in J&J or already an investor, there are several keys to understanding where the company is—and where it is going.
- Update on Product Recalls. The damage for 2010 is already well-documented. The massive recalls of over-the-counter medicines, including Children's Motrin and Children's Tylenol, will cost about $600 million. We also know that Colleen Goggins, the head of the consumer products division, will be retiring. One of the products has begun shipping again, and we should get an update as to when the remainder will return to stores in 2011.
Listen for revisions to revenue estimates or the product-shipment schedules. J&J is still repairing the public relations damage, as well as dealing with pressure and investigations from the federal government.
- Weak Dollar. J&J is a global company, and the assumption is that currency will be a tailwind for earnings. Citi put out a note on Monday, stating that the benefit for 2010 would be muted compared to 2011, when it said currency would be a $1.6 billion benefit, with the biggest boost coming in the second quarter.
- Pharma. According to Dodds, expect questions on Concerta, a drug that's likely to go generic in the near future. That's about $1 billion in sales that may be at risk. There should also be considerable interest in the arbitration case with Merck over rights to arthritis treatment Remicade. A win for J&J would be worth billions of dollars.
"Pharma is 40 percent of profit, and relative to others out there, it has better prospects," said Dodds, who added that success in pharma could definitely offset the issues within the consumer products division.
- Crucell . The company should provide an update on when the $2.4 billion will close. The most recent guidance was early in 2011, but there might be some new information on the approval process.
- Device Business. Dodds says that J&J has become a good barometer for orthopedic implant stocks like Stryker . And because of that, a lot of other companies move when J&J reports.
Generally, that's what J&J has become: A barometer.
"It's like the GE of healthcare," said Dodds, who sees the company beating consensus estimates by about 2 cents a share and by $100 million. The major difference seems to be currency, because many analysts don't factor in the diversity of currencies in which J&J does business.
Citigroup maintained its buy rating, but raised the price target to $70 with an expected total return on the stock of 13 percent.