Johnson & Johnson is a buy as shares slide after its quarterly earnings report

Published Tue, Jul 19 20223:54 PM EDTUpdated Tue, Jul 19 20223:58 PM EDT

Johnson & Johnson (JNJ) reported second-quarter earnings results on Tuesday that beat analysts' expectations. Reported sales increased 3% year over year to $24.02 billion, or 8.1% growth on an adjusted operational sales basis (which excludes the impact of acquisitions and divestitures and currency), exceeding expectations of $23.77 billion on FactSet. Adjusted earnings per share increased 4.4% year over year to $2.59, beating estimates of $2.54. With about half of JNJ's sales coming from outside the United States, it is not a surprise to see the company's sales take a big hit from the strong U.S. dollar. Currency had a 10.1% negative impact to sales reported outside the U.S. Bottom line It was a solid quarter for Johnson & Johnson as its high-quality Pharma franchise continues to march towards its 2025 goal of $60 billion in revenues while the consumer health and MedTech businesses delivered growth despite facing the toughest quarterly comparisons they will face this year. Although the impact of the strong U.S. dollar may take estimates for the second half of the year down slightly, we are willing to look past this headwind because the underlying business continues to perform well and the stock will be a big winner if and when the dollar's rally loses steam. Shares are down slightly this afternoon as the company beat on earnings but didn't raise its full-year guidance (on an operational basis). That's not good enough for a stock that is roughly flat on the year in a bear market. Also, today's tape has more of a risk-on attitude to it, with economically sensitive sectors leading and more defensive areas of the market lagging. Still, we think this pullback in a well-run, high-quality business that is breaking into two soon represents a solid long-term opportunity and we reiterate our 1 rating. (For a reminder, here's how we rate the stocks in our portfolio.) Pharmaceutical Sales in this segment were $13.32 billion, representing an increase of 12.3% on an adjusted operational basis and a beat compared to expectations for sales of $12.96 billion. Management believes this business is on track for its 11th consecutive year of above-market adjusted operational sales growth. By product line: Immunology sales increased 8.1% on an operational basis to $4.41 billion. Of note, Stelara sales grew by 18.6% on an operational basis to $2.6 billion. Also Tremfya sales increased 29.7% on an operational basis to $597 million, missing estimates of $673 million. Oncology sales increased 21.9% on an operational basis to $4.04 billion. Of note, the multiple myeloma franchise was a standout with Darzalex sales increasing 46.1% on an operational basis to $1.99 billion, beating estimates of $1.814 billion. Sales of Imbruvica, which is jointly commercialized by JNJ and Abbvie (ABBV), fell 7.2% on an operational basis to $970 million, missing estimates of about $1.1 billion. Neuroscience sales increased 0.5% on an operational basis to $1.73 billion. Infectious diseases increased 42% on an operational basis to $1.32 billion. Of note, Covid-19 vaccine sales totaled $544 million in the quarter Cardiovascular/metabolism/other sales fell 3.1% on an operational basis to $972 million. Pulmonary hypertension sales increased 0.9% on an operational basis to $843 million. MedTech Sales in this segment were $6.9 billion, representing an increase of 3.4% on an adjusted operational basis against difficult year-over-year comparisons. The quarterly result was a slight miss compared to expectations for sales of $7.02 billion. Management cited regional Covid-19 mobility restrictions as a headwind in the quarter. By product line: Surgery sales increased 1.8% on an operational basis to $2.45 billion, beating estimates of $2.24 billion. Orthopaedics sales increased 0.5% on an operational basis to $2.16 billion, missing estimates of $2.21 billion. Vision sales increased 10.9% on an operational basis to $1.24 billion, beating estimates of $1.19 billion. Interventional solutions sales increased 5.3% on an operational basis to $1.05 billion, missing estimates of $1.11 billion. Consumer health Sales in this segment were $3.8 billion, representing an increase of 2.9% on an adjusted operational basis against difficult year-over-year comparisons. Expectations were for sales of $3.72 billion. By product line: OTC sales increased 7.5% on an operational basis to $1.48 billion, edging estimates of $1.47 billion, driven by a strong cough/cold/flu season and strong performance of Imodium. Skin health/beauty sales fell 0.3% on an operational basis to $1.13 billion, beating estimates of $1.1 billion. Although this business line beat analyst expectations, we thought sales should have grown in the quarter due to the strength of the category. The decline in sales was mostly due to supply chain constraints and not a demand issue and we expect results to improve in the back half of the year. Oral care sales fell 4% on an operational basis to $394 million vs. $413 million expected. Baby care sales increased 0.5% on an operational basis to $375 million vs. $372 million expected. Women's health sales increased 7.2% on an operational basis to $230 million vs. $213 million expected. Wound care/other sales fell 7.4% on an operational basis to $197 million vs. $207 million expected. Guidance Turning to the company's full year 2022 outlook, management maintained its guidance for $97.3 billion to $98.3 billion in operational sales and adjusted operational sales growth of 6.5% to 7.5%. However, the company lowered its estimated reported sales outlook by $1.5 billion to the range of $93.3 billion to $94.3 billion due to foreign exchange headwinds. The company also slightly lowered its adjusted pre-tax operating margin outlook from a roughly 50 basis point improvement to approximately flat year over year due to prolonged inflationary pressures in labor, energy and transportation. On earnings, the company now sees adjusted EPS in the range of $10.65 to $10.75, a tightened range with the same midpoint as its previous view of $10.60 to $10.80. On a reported basis, management lowered its view to $10 to $10.10 from $10.15 to $10.35 due to a $0.20 per share incremental foreign exchange headwind. (Jim Cramer's Charitable Trust is long JNJ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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A bottle of Johnson & Johnson's brand lotion for sale at a pharmacy in Salt Lake City, Utah, on Thursday, Feb. 25, 2021.

George Frey | Bloomberg | Getty Images

Johnson & Johnson (JNJ) reported second-quarter earnings results on Tuesday that beat analysts' expectations.