J&J stock dip after earnings beat reflects 2022 outperformance rather than the results

Published Tue, Oct 18 202212:33 PM EDT

We believe that Wall Street's muted reaction to Johnson & Johnson 's (JNJ) better-than-expected quarter has more to do with the stock's outperformance this year compared to the broader market than anything that investors heard when the results were reported before the opening bell Tuesday. The Club stock and Dow component opened slightly higher and then drifted slightly lower in the afternoon. Reported sales for the third quarter increased 1.9% year over year to $23.79 billion, exceeding the $23.34 billion consensus estimate provided by Refinitv. On an adjusted operational basis, which excludes the impact of acquisitions and divestitures and currency, sales rose 8.2%. Adjusted diluted earnings-per-share decreased 1.9% to $2.55 but still came in ahead of the $2.478 the Street was expecting. With about half of J & J's sales coming from outside the United States, it was not a surprise to see the company's Q3 sales take a big hit from the strong dollar. The American currency had a 12.6% negative impact to sales reported outside the U.S., greater than the 10.1% headwind we saw in the second quarter. Bottom line It was a solid quarter for Johnson & Johnson. While the strong dollar is and will remain a headwind for the foreseeable future, the underlying results reflect management's ability to effectively navigate the difficult macroeconomic environment. Meanwhile, the planned separation of the Consumer Health business remains on track — and as we've noted previously, in our view, it represents a positive catalyst in the year ahead, especially as the business continues to see positive operational momentum. From a financial perspective, as noted in the post-earnings conference call, J & J remains in a strong position thanks to year-to-date free cash flow of more than $13 billion and a net cash position of roughly $2 billion — that's $34 billion in cash and $32 billion debt. This strong position has allowed the company to increase research and development (R & D) spending by about 8% on a year-to-date basis versus the prior year. It also provides management the opportunity to evaluate strategic acquisitions and external collaborations while returning cash to shareholders. We also remind Club members that the board of directors previously authorized a new $5 billion share buyback program, which along with dividend payments, has resulted in the return of almost $11 billion to shareholders in 2022. Despite the positive results, the flat stock in Tuesday's trading can also be partly attributed to a slightly weaker outlook. Updated full-year earnings guidance at the midpoint, on a reported basis, of $10.05 per share implies Q4 earnings of roughly $2.24, which is below the expectations of $2.30 coming into the print. However, the reiterated full-year earnings midpoint comes despite an incremental currency headwind of 3 cents per share. Management's reluctance to pass through the full impact of the quarterly beat likely signals some conservatism given the strong dollar, continued high rates of inflation, and broader macroeconomic uncertainty. Pharmaceutical Sales in Q3 for this segment worldwide were $13.2 billion, representing an increase of 9% on an adjusted operational basis, which excludes the impact of currency translation, outpacing expectations for sales of $13.01 billion. Management said on the call they continue to see this business on track for its 11th consecutive year of above-market adjusted operational sales growth in 2022. Here's a breakdown by product line. Immunology sales increased 5.6% on an operational basis to $4.29 billion. Driving the results were increased sales of Stelara on the back of market growth and market share gains in Crohn's Disease and Ulcerative Colitis. Same story for Tremfya sales in Psoriasis and Psoriatic Arthritis. Remicade sales, on the other hand, declined as a result of competition from biosimilars, also known as generics. On an operational basis: Stelara sales grew by 8% to $2.45 billion, below expectations of $2.6 billion; and Tremfya sales increased 41.9% to $729 million, missing estimates of $749 million. Oncology sales increased 20% on an operational basis to $4.06 billion. Notably, cancer drug Darzalex sales increased with market share gains seen in all regions. The global launch of Erleada continued to be strong. Additionally, though Imbruvica remains a market leader, sales declined as a result of increased competition. On an operational basis: Darzalex sales increased 38.7% to $2.05 billion, beating estimates of $2.01 billion; sales of Imbruvica, which is jointly commercialized by J & J and fellow Club holding AbbVie (ABBV), fell 7.2% to $911 million, missing estimates of about $1.03 billion; and Erleada sales were up 51.2% to $490 million, in line with expectations. Neuroscience sales increased 5.9% on an operational basis to $1.68 billion. Infectious Diseases increased 3.8% on an operational basis to $1.3 billion. Covid vaccine sales continued to aid the segment, coming in at $489 million in the quarter. Cardiovascular, Metabolism, Other sales increased 1.4% on an operational basis to $1.03 billion. Pulmonary Hypertension sales increased 3% on an operational basis to $852 million. Looking ahead, management said that despite Stelara losing exclusivity — meaning generics will be able to come to market — they continue to anticipate sales growth in the coming years as they work toward their goal of $60 billion in Pharmaceutical sales by 2025. MedTech Worldwide sales in this segment for Q3 were $6.8 billion, representing an increase of 8.1% on an adjusted operational basis. The quarterly result was a slight miss compared to expectations for sales of $6.9 billion. On the call, management said, "Drivers for growth across MedTech include procedure recovery as well as focused commercial strategies in differentiated new products." Here's a breakdown by product line. Surgery sales increased 7.1% on an operational basis to $2.42 billion, beating estimates of $2.36 billion. Orthopedics sales increased 4.7% on an operational basis to $2.1 billion, outpacing estimates of $2.08 billion. Vision sales increased 8.6% on an operational basis to $1.21 billion, in line with expectations. Interventional solutions sales surged 17.7% on an operational basis to $1.06 billion, outpacing estimates of $1.01 billion with double-digit growth in all regions. Consumer Health Sales worldwide in this segment for Q3 were $3.8 billion, representing an increase of 4.7% on an adjusted operational basis. Expectations were for sales of $3.73 billion. Here's a breakdown by product line. OTC sales increased 7.2% on an operational basis to $1.52 billion, exceeding estimates of $1.41 billion, driven by price actions, and elevated levels of cough/cold/flu and pediatric fever rates this season, though the results were partially offset by ongoing supply constraints