MR Montage Resources Corporation

Johnson & Johnson (JNJ) posted second-quarter 2011 earnings (excluding special items) of $1.28 per share, $0.04 above the Zacks Consensus Estimate and 5.8% above the previous year's $1.21.

The company beat expectations despite being hampered by product recalls.

Johnson & Johnson’s revenues for the reported quarter increased 8.3% year-over-year to $16.6 billion. Revenues exceeded the Zacks Consensus Estimate of $16.2 billion. Operational factors and foreign exchange movement favorably impacted sales by 2.6% and 5.7%, respectively. Including one-time items, the company reported earnings of $1.00, 18.7% below the year-ago earnings of $1.23.

The Quarter in Detail

Second quarter sales increased 0.1% in the domestic market. Meanwhile, international sales increased 15.9%, consisting of 4.9% operational growth and 11.0% favorable currency impact.

The Medical Devices & Diagnostics segment posted sales of $6.6 billion, up 7.2% year over year. Operational factors and foreign exchange movement positively impacted sales for the Medical Devices & Diagnostics segment by 1.3% and 5.9%, respectively. Sales in the domestic market increased 0.1% to $2.9 billion; international market sales increased 13.4% to $3.7 billion. Favorable currency movement helped drive international sales.

Primary contributors to growth included Biosense Webster's electrophysiology business, Diabetes Care’s blood glucose monitoring products, Vistakon's disposable contact lenses, DePuy's sports medicine and neurovascular business, Ethicon's surgical care products and Ethicon Endo-Surgery's minimally invasive and advanced sterilization products.

The Cardiovascular Care franchise continued to record a decline in sales with performance being impacted by competitive pressures in the drug-eluting stent market.

Pharmaceutical segment sales increased 12.2% year-over-year to $6.2 billion. Sales in the domestic market increased 4.1% to $3.2 billion whereas the international market grew 22.6% to $3.0 billion.

Pharmaceutical sales  were driven by products like Remicade, Prezista, Velcade and Caelyx among others. New products like Stelara, Zytiga, and Invega Sustenna also contributed to growth.

The Consumer segment recorded revenues of $3.8 billion in the reported quarter, up 4% from the second quarter of 2010. While operational factors reduced sales in the segment by 1.8%, foreign currency movement favorably impacted sales by 5.8%. Sales in the domestic market declined 8.5% year over year to $1.3 billion, whereas the international market recorded a 12.4% year-over-year increase to $2.5 billion.

The series of OTC product recalls and the suspension of manufacturing at Fort Washington facility hampered US sales.

Earnings Guidance Maintained

Following the release of second quarter results, Johnson & Johnson maintained its 2011 adjusted earnings guidance of $4.90 - $5.00 per share. The Zacks Consensus Estimate currently stands at $4.95.

Neutral on Johnson & Johnson

We currently have a Neutral recommendation on Johnson & Johnson. The stock carries a Zacks #3 Rank (Hold rating) in the short run. Even though Johnson & Johnson has been facing challenges in the form of OTC product recalls, pricing austerity in the EU and generic competition, we believe that the company’s diversified business model, lack of cyclicality and strong financial position will help it in tough situations.

Other catalysts could be regulatory approval for a couple of important pipeline candidates. We are also pleased with the settlement of the company’s dispute with Merck (MRK) regarding the ex-US distribution rights of Remicade (infliximab) and Simponi (golimumab). The amended deal has made Johnson & Johnson solely responsible for marketing Remicade and Simponi in markets such as Canada, Central and South America, the Middle East, Africa and Asia Pacific from July 1, 2011.

 
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