Can Johnson & Johnson Sustain Its Growth in 2017?

By Dan Caplinger Markets Fool.com

Johnson & Johnson (NYSE: JNJ) has become a colossus in the healthcare industry with its exposure to the pharmaceutical, medical device, and consumer over-the-counter health-products markets combining to make the company a force to be reckoned with. Yet although the stock performed well in 2016, gaining 15% for the year, J&J shares lost ground in the second half of the year. Now, some investors are worried that harsher drug-pricing regulations could eat into profits in what has been J&J's biggest source of growth recently.

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Coming into Tuesday's fourth-quarter financial report, Johnson & Johnson shareholders hope that the company will produce solid growth and give favorable guidance for 2017. Let's take an early look at Johnson & Johnson and what it's likely to tell us in its earnings report.


Image source: Johnson & Johnson.

Stats on Johnson & Johnson

Expected EPS Growth

8.3%

Expected Revenue Growth

2.5%

Forward Earnings Multiple

16

Expected Five-Year Annualized Growth Rate

6.5%

Data source: Yahoo! Finance.

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What's ahead for Johnson & Johnson earnings?

In recent months, investors have largely kept their focus on Johnson & Johnson earnings, with just a small $0.01 per-share reduction in their predictions for fourth-quarter and full-year 2017 results. The stock, however, has lost its upward momentum, falling about 2% since mid-October.

Johnson & Johnson told investors a similar story in its third-quarter results as it has on numerous occasions in the past. Revenue climbed at a moderate 4% pace, but net income growth managed to accelerate to about 12% from year-ago levels.

As we've seen many times before, the pharmaceutical segment showed the largest growth in sales, climbing 9%. By contrast, medical device revenue growth was minimal, and J&J's consumer division posted a slight decrease of nearly 2% on the top line. Strength in the U.S. dollar hurt the company's performance, but it nevertheless made favorable comments about its earnings, guiding investors toward the upper end of its previous range.

Yet the biggest news in recent months for Johnson & Johnson had to do with the potential acquisition of Actelion. In November, J&J confirmed that it was in negotiations for a possible purchase of the Swiss drugmaker.

According to reports, Johnson & Johnson's first bid of $26 billion wasn't enough to satisfy Actelion, which wanted more. Despite apparently making about a $1 billion to $2 billion increase to the opening bid, Johnson & Johnson initially chose not to make an even larger boost toward the $30 billion to $32 billion range that Actelion was reportedly looking to get from the healthcare giant. Although Actelion's extensive portfolio of treatments for pulmonary arterial hypertension were a big draw, some skeptics of the deal thought that J&J was smart to walk awaybecause of the high price tag it would have taken to get Actelion to accept.

After only a short time, however, J&J and Actelion said they were back in talks. According to most recent reports, the two companies have figured out a valuation that both can agree with, and now, Johnson & Johnson and Actelion are trying to determine a way to spin-off research and development assets to give Actelion CEO Jean-Paul Clozel a continuing operation to run. Even now, there's no assurance that the two parties will find a resolution to the issue, but some believe that a final agreement could come before the end of January.

Meanwhile, Johnson & Johnson still faces some challenges throughout its business. Sluggish results in its consumer and medical devices segments don't appear likely to improve, and the biggest purpose that they're serving for J&J right now is to provide ballast in case something happens to the pharma business. At the same time, some of Johnson & Johnson's pharmaceutical rivals have seen recent FDA approvals, and have pipelines with arguably greater potential for success in the immediate future. Still, J&J is optimistic about key drugs like autoimmune treatment Remicade, anticoagulant Xarelto, and Crohn's disease drug Stelara.

In the Johnson & Johnson earnings report, it will be interesting to see how the timing of any announcement related to Actelion plays into the conglomerate's earnings results. With some investors looking for J&J to pursue growth opportunities, an acquisition might be an expensive way to move forward. But until the deal's terms are set, it won't be obvious whether Johnson & Johnson paid too much for a risky proposition going forward.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Johnson and Johnson. The Motley Fool has a disclosure policy.