Johnson & Johnson deserves more credit for another healthy quarter and strong guidance

Published Tue, Jan 24 20234:32 PM ESTUpdated Wed, Mar 8 20232:16 PM EST

Johnson & Johnson (JNJ) posted another solid quarter of healthy growth — and another productive year of free-cash-flow generation — despite a slight miss on sales. The health-care company and Club holding on Tuesday reported sales for the fourth quarter of $23.706, down 4% from a year earlier and missing the $23.706 billion consensus estimate provided by Refinitv. On an adjusted operational basis, which excludes the impact of acquisitions and divestitures and currency, sales rose 0.8%. Adjusted diluted earnings-per-share was $2.35, up more than 10.3% from a year ago and a solid beat on the Street estimate of $2.23. Bottom line JNJ was a resilient performer in 2022, with shares of the drug maker squeaking out a small gain despite the broader market sell-off. But the new year has been tough on pharmaceutical stocks and almost all of health care, including JNJ stock, which is down 6% year to date. This move is not an indictment of the company's operations. Rather, it's about investors favoring higher multiple stocks and companies with more cyclicality following a year where defensive names outperformed. It's surprising to see JNJ not get any credit today for guiding 2023 earnings-per-share nearly $0.20 above estimates, but that might be the opportunity here. We continue to appreciate the growth of JNJ's Pharma and MedTech business as well as the consistency of the Consumer franchise and look forward to the breakup later this year. ( The company is preparing to spin off its consumer health unit into a publicly traded company separate from its pharmaceutical and medical technology operations.) In the near term, we're being patient with the stock while it is out of favor and will look to opportunistically add to our position as the stock price comes down. Over the longer term, the breakup will be a big win for shareholders. Guidance Some analysts had been tweaking lower their estimates for 2023 after CEO Juaquin Duato gave a cautious presentation at the JPMorgan Healthcare conference in early December of last year. Revenues appear to be appropriately calibrated, with management forecasting reported sales growth of 4.5% to 5.5% year over year to the range of $96.9 billion to $97.9 billion. The midpoint of $97.4 billion is slightly below the consensus estimate of $97.754 billion. This outlook includes no impact from foreign exchange. But adjusted earnings look great. Johnson & Johnson forecasts adjusted EPS on an operational basis to grow 2.5% to 4.5%, which at a midpoint of $10.50 compares favorably to the consensus of $10.33. Product segments Pharmaceutical revenues declined 7.4% on a reported basis and 2.5% on an operational basis to $13.136 billion, which was roughly in line with the Street estimate of $13.195 billion. Excluding sales from JNJ's Covid-19 vaccine — which is the better way to look at the performance of the business worldwide — pharmaceutical operational sales growth increased 3.9%, with 2.4% growth in the United States and 6% from the rest of the world. Even though JNJ's drug business is up against the loss of exclusivity of Stelara late next year, management expects 2023 will be its 12th consecutive year of above-market growth, driven by Darzalex, Erleada, Tremfya, Invega, Sustenna, and Uptravi, along with the continued uptake of recent launches such as Carvykti, Spravato, and Tecvayli. Once again, management reiterated its target of $60 billion in pharmaceutical revenue in 2025. Analysts still haven't aligned their models with JNJ's forecast, with the consensus estimate currently sitting at about $53.959 billion. Management says the disconnect is mostly related to its multiple myeloma portfolio, which the company would argue is being underappreciated by the Street. If JNJ can get analysts more confident in this $60 billion goal, the multiyear earnings upgrades would be significant. For MedTech, which includes instruments and tools used in orthopedics and surgery, revenues fell 1.2% on a reported basis and increased 4.9% on an operational basis to $6.776 billion, a wide miss against expectations of about $7 billion. The results differed by geography. Sales in the U.S. increased by 7.1% due to the continued recovery from pandemic-delayed procedures. New product introductions boosted sales as well. The shortfall in the quarter was due to International, and more specifically China, where the resurgence of Covid in the country and the associated lockdowns weighed on sales. Johnson & Johnson's $16.6 billion acquisition of Abiomed closed on Dec. 22, and its financial results were included in the Interventional Solutions segment. Its addition to the MedTech division is expected to help accelerate sales growth this year. Lastly, consumer revenues increased 1% on a reported basis and 6.4% on an operational basis to $3.767 billion, beating analysts' estimate of $3.753 billion. The main driver of the beat came from OTC (over the counter), thanks to a strong cough, cold, and flu season. The skin health and beauty segment performed well too, thanks to easing supply constraints and strength from Neutrogena. (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. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Johnson's baby powder on a supermarket shelf in Alhambra, California.

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