Johnson & Johnson (JNJ) reported strong second – quarter profit and revenue before the opening bell Thursday, with better-than-expected results each domestically and internationally, in addition to across all major operating segments. J & J’s second-quarter reported sales rose 6.3% year-over-year to $25.53 billion, exceeding the Refinitv consensus estimate of $24.63 billion. (On an adjusted operational basis, which excludes the impact of acquisitions and divestitures in addition to currency fluctuations, sales rose 6.2% annually.) Adjusted diluted earnings got here in at $2.80 per share, a solid beat versus the $2.59 per-share estimate and just over 8% higher than a 12 months ago. (On an operational basis, earnings per share (EPS) increased 9.7% 12 months over 12 months.) JNJ YTD mountain Johnson & Johnson (JNJ) YTD performance Wall Street on Thursday was rewarding the Club name and Dow component handsomely whilst uncertainty stays around how the corporate can resolve the tens of hundreds of talc lawsuits filed against it. Those talc litigation worries have weighed on the stock this 12 months, with shares down greater than 4.5% 12 months so far in comparison with the S & P 500 ‘s nearly 18.8% advance over the identical stretch. Bottom line While talc stays an overhang, there was quite a bit to love on this report. All three segments performed higher than expected. We saw strength across the globe. Though not earnings related, we also got a welcome update on management’s plans for the rest of the corporate’s stake in Kenvue (KVUE), J & J’s consumer health split-off that became a publicly traded stock back in May. Because of this of the strong performance, management raised their sales and earnings outlook for the rest of the 12 months and reiterated their ambitious 2025 Pharmaceutical sales goal. Moreover, management called out an annual improvement in the corporate’s income before tax profit margin, which expanded to 34.6%, a 60 basis point expansion versus the year-ago period as improvements within the Pharmaceutical and MedTech divisions were only partially offset by a contraction in Consumer margins. While remaining conscious of talc litigation concerns, we’re reiterating our 1 rating and $195 price goal as a consequence of the strong operating results and management’s update on the Kenvue separation. Given what we saw in Thursday’s release, we proceed to imagine that a resolution on the talc front — even when J & J has to place up a bit greater than the $8.9 billion it has already committed to — would lead to significant upside as it might remove the largest thing holding the stock back years. Guidance Compounding the strong quarterly results, management increased their full-year guidance for each adjusted operational sales excluding Covd vaccine-related revenue and adjusted operational EPS. Full-year 2023 adjusted operational sales (excluding the impact of acquisitions and divestitures, currency fluctuations, and Covid vaccine sales) are actually expected to extend 6% to 7%, up from the previously forecasted range of 4.5% to five.5%. Operational sales (excluding currency fluctuations and Covid vaccine sales) are actually expected to are available in the range of $99.3 billion to $100.3 billion (a rise of seven% to eight%), up from the previously forecasted range of $97.9 billion to $98.9 billion (or annual growth of 5.5% to six.5%) Reported sales (excluding Covid vaccine sales) are actually expected to be between $98.8 billion and $99.8 billion (a rise of 6.5% to 7.5%), up from the previously forecasted range of $97.9 billion to $98.9 billion (or annual growth of 5.5% to six.5%). This compares to expectations of $98.8 billion coming into the print, so a beat on the midpoint. Adjusted operational EPS (excludes the impact of currency translations) are actually expected to be between $10.60 and $10.70 (a 4.5% to five.5% annual increase), up from the prior range of $10.50 to $10.60 (or a 3.5% to 4.5% annual increase). This guide matches expectations coming into the print, on the midpoint. Adjusted EPS are actually expected to be within the range of $10.70 to $10.80 (growth of 5.5% to six.5% versus the prior 12 months), up from the prior forecast of $10.60 to $10.70 (or growth of 4.5% to five.5% versus the prior 12 months). Kenvue plans Management updated their thoughts on the right way to handle J & J’s 89.6% interest in Kenvue. Together with the discharge of quarterly financial results, the corporate announced it “intends to ‘split off’ Kenvue shares through an exchange offer because the type of its next step within the separation, subject to market conditions.” On the decision, management added that a young offer could launch as early as “the approaching days.” What this implies, is that reasonably than selling shares into the open market, like we saw with the Kenvue IPO in what’s known as a “carve out,” J & J will offer existing shareholders the selection to exchange all, some, or none of their shares of Johnson & Johnson common stock for shares of Kenvue common stock. This differs from a “spin-off” because investors must surrender their J & J shares —whereas a derivative would simply have the Kenvue position given to them, almost like a dividend. KVUE ALL mountain Kenvue performance since May IPO We like the choice to go the route of a split-off versus the opposite two options because, as management noted, it offers the corporate the flexibility to divest its Kenvue stake while potentially — depending on what number of investors select to simply accept the offer — while acquiring “numerous outstanding shares of Johnson & Johnson common stock at one time in a tax-free manner for U.S. federal income tax purposes.” Consider this as a type of buyback that uses no money and doesn’t reduce the corporate’s future financial flexibility. Given Kenvue’s market cap of roughly $48 billion, and J & J’s 89.6% stake, we could possibly be a possible buyback in the world of $40 billion. Once we’ve a greater understanding of the terms of the offer, we’ll provide our own thoughts and an update on our intentions. For now, our initial thought is to keep on with our Johnson & Johnson shares as we prefer the Pharmaceutical and MedTech divisions, which is able to make up the brand new J & J and trade under the present JNJ ticker symbol, to the Consumer segment, which is able to go along with Kevnue whose ticker symbol is KVUE. This decision to go the split-off route may possibly be contributing to the greater than 6% increase in JNJ on Thursday and the roughly 3% selloff in KVUE. The pondering behind these moves is to entice investors to take the deal. It’s possible that J & J management will offer up Kenvue shares at a reduction to market value. If that is what investors are indeed pondering then what we’re seeing could possibly be an arbitrage play, with investors buying shares of JNJ with the mind that they will flip them later for discounted KVUE shares. Regardless, arbitrage is not our game and we wish to be invested in J & J for the long run. We imagine the brand new company consisting only of the Pharmaceutical and MedTech-oriented businesses has a big runway for growth ahead of it, after the separation is complete. Companywide Q2 Results from the Consumer unit, represented by Kevnue, will in the meanwhile proceed to be reported as a part of Johnson & Johnson’s quarterly numbers. The one change — since J & J owns 89.6% of Kenvue — is that 10.4% of earnings generated since Kevnue went public in early May to the tip of the quarter are not any longer attributed to J & J. (Remember, that 10.4% is the a part of the Kevnue Consumer business is doesn’t own.) Consumer Second-quarter Consumer sales rose 5.4% year-over-year on a reported basis (as reflected within the earnings table above) to simply over $4 billion, exceeding estimates. (On an adjusted operational basis, sales rose 7.7%). As we will see, the outperformance here can largely be attributed to the over-the-counter revenue. On the decision, management called out “strategic price increases and growth in OTC globally as a consequence of strong pain performance and cold, cough and flu season.” Consumer pretax profit margin contracted from “25.9% to 23.5% as a consequence of incremental costs to support the standalone Consumer Health business, foreign-exchange impacts and commodity inflation, partially offset by supply chain efficiencies,” the team added. Pharmaceutical Pharmaceutical sales were up 3.1% on a reported basis within the second quarter, coming in at $13.73 billion, exceeding estimates. (Sales on an adjusted operational basis rose 3.9%). On the decision, management noted that when excluding the impact of lower Covid vaccine results, sales were up 6.2% on an operational basis (which excludes the impact of translational currency). Though small, we wish to focus on better-than-expected results and superb annual growth seen in Spravato and Carvykti, the latter of which contributed to over 30% annual growth in J & J’s multiple myeloma portfolio. These drugs are “expected to be essential contributors to achieving [J & J’s] 2025 [Pharmaceutical] sales goal” of $57 billion, the team said. The strong growth here is encouraging since the Street stays skeptical of the achievability of this goal, currently modeling out just below $55 billion in Pharmaceutical sales for 2025. Management also said Pharmaceutical pretax margin expanded from 42% to 42.7%, “primarily driven by favorable patient mix, sales marketing, and administrative expense leverage.” They added research and development (R & D) portfolio prioritization was “partially offset by higher milestone payments.” MedTech MedTech sales in Q2 soared nearly 13% on a reported basis to a better-than-expected $7.79 billion. (Sales rose 9.9% on an adjusted operational basis). Driving the outcomes were “electrophysiology products in Interventional Solutions, trauma in Orthopedics, wound closure products in General Surgery, biosurgery in Advanced Surgery, and call lenses in Vision,” the corporate said. MedTech pretax margin expanded from 26.5% to twenty-eight.6%, “driven by favorable mental property-related litigation settlements and price management initiatives partially offset by commodity inflation,” the team added. (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’ll 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 a few stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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A Johnson & Johnson constructing is shown in Irvine, California.
Mike Blake | Reuters
Johnson & Johnson (JNJ) reported strong second–quarter profit and revenue before the opening bell Thursday, with better-than-expected results each domestically and internationally, in addition to across all major operating segments.