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Drug Division Drives Steady Quarter for Johnson & Johnson

Damien Conover, CFA

Damien Conover: Johnson & Johnson reported third-quarter earnings that largely surpassed consensus expectations but were largely in line with our expectations and so we're not changing our fair value. We think the stock is slightly overvalued but still very well positioned for growth on a fundamental basis and really believe that the firm has a strong wide economic moat. 

When looking at the quarter, the drug division again helped lead overall results. They've got a lot of new products hitting the market that are really in areas of unmet medical need that allows them to price these drugs very well. The uptake is very strong because there's a lot of unmet medical need. 

Outside of the drug division, the consumer group actually did very well, and we were surprised by that. It's been an area of weakness in the past, so it's nice to see that group finally hitting its stride and really showcasing the brand power of that division. 

Lastly in the medical device division, the scenario where Johnson & Johnson has struggled a little bit with innovation and some pricing headwinds, and this is continuing to be a bit of a laggard for the company. We do expect that to continue for the next couple years; however, longer term with some of the robotics that they're working on looks like an area of nice growth beyond the 2020 time period. 

Overall the results were better than consensus and pretty close to what we are anticipating, and we continue to view the stock with a wide economic moat and just slightly overvalued.