Johnson & Johnson Opens 2017 on a Cautious Note

By Dan Caplinger Markets Fool.com

Investors look to Johnson & Johnson (NYSE: JNJ) to provide a complete picture of the healthcare industry. With its pharmaceutical, medical device, and consumer products businesses, Johnson & Johnson covers a wide swath of the healthcare space, and the blue-chip giant has done a good job of producing solid returns for investors over the long run. Coming into Tuesday's fourth-quarter financial report, J&J investors wanted to see signs that the company's forward momentum would carry into 2017, but some were disappointed when Johnson & Johnson gave guidance for the coming year that indicated a somewhat less rosy outlook than hoped. Let's look more closely at how Johnson & Johnson did and what it sees in its future.

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J&J has come a long way in its history. Image source: Johnson & Johnson.

J&J produces strong earnings despite sluggish sales

Johnson & Johnson's fourth-quarter financial results were mixed from most investors' perspective. Sales climbed 1.7% to $18.11 billion, which represented slower growth than the nearly 3% rate that those following the stock had wanted to see. However, after making allowances for special items like amortization of intangible assets, adjusted earnings came in at $1.58 per share. That was $0.02 per share higher than the consensus forecast among investors.

Interestingly, in looking at J&J's sector results, the healthcare conglomerate saw a changing of the guard in the fourth quarter. The long-lagging consumer products segment actually led the way higher with sales gains of 3.4%, as the domestic business soared by nearly 13% to offset weakness internationally. The key pharmaceutical segment also posted growth of 2.1%, while medical devices inched higher by just 0.2%. Currency impacts played a role in holding back Johnson & Johnson's revenue gains, but overall, the impact was small, amounting to just six-tenths of a percentage point. The biggest currency hit came from the international consumer space, which took a 2.3-percentage-point hit and reversed what would have been a small gain on an operational basis. Currency pressures were especially strong in Europe, but J&J actually got some favorable benefits on the currency front in its Asia-Pacific and Africa region.

For the full year, Johnson & Johnson pointed to the best-performing products in each segment. For over-the-counter products, Tylenol, Neutrogena, Aveeno, and Listerine were top brands. New pharmaceutical products included blood and lymph node cancer fighter Imbruvica and Darzalex for multiple myeloma, while existing stalwarts Stelara and Remicade contributed positively to J&J's results. In medical devices, cardiovascular electrophysiology products and Acuvue contact lenses were among the top drivers of growth.

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What's ahead for Johnson & Johnson in 2017?

CEO Alex Gorsky was pleased with the performance of Johnson & Johnson's businesses, and he has high hopes for the coming year. "Looking forward to 2017," Gorsky said, "we expect to continue driving sustainable, long-term growth through the new products, science, and innovation that our talented colleagues and partners of Johnson & Johnson are advancing to positively impact human health."

In addition, J&J said that it's looking at strategic options in relation to its diabetes care units. In particular, the company believes that it might seek joint ventures, strategic alliances, or a sale of businesses like LifeScan, Animas, and Calibra Medical.

Johnson & Johnson's guidance for 2017, however, fell short of the high expectations that shareholders had for the company. J&J said that it anticipated sales of $74.1 billion to $74.8 billion, which would work out to growth of 4% to 5%. Earnings should come in between $6.93 and $7.08 per share. That's less than the $75.1 billion in revenue and $7.11 per share in earnings that marked the consensus among investors going into the report.

In response, Johnson & Johnson investors showed their disappointment, sending the stock down about 2% in morning trading following announcement. It's not surprising to see J&J holding back somewhat in an uncertain environment for the healthcare industry right now. However, in terms of long-term prospects, Johnson & Johnson signaled that it's prepared to move forward aggressively to capitalize on opportunities as they arise.

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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.