Johnson & Johnson Posts Steady Quarter

Johnson & Johnson JNJ reported fourth-quarter earnings largely in line with both our and consensus expectations, but the firm issued 2020 guidance ahead of our projections. We expect the strong guidance to support a slight increase to our fair value estimate, but we still don’t expect the stock to look undervalued. The 2020 operating margin guidance of 100 basis points of expansion is higher than our flat projections. The firm’s decision to cut costs in marketing and administrative expenses combined with plans to cut support for less profitable consumer goods should help the firm achieve its guidance. The likely continued fast growth of the drug group (highest margin segment) should also help with margin expansion. The strong operating margins of close to 32% in 2020 should help drive overall earnings growth and reflect the firm’s wide moat.

While total operational sales growth of 3% was negatively impacted by generic drug competition, the drug division still posted the highest segment growth (up 4.5%), a trend we expect will continue in 2020. Generics to cancer drugs Zytiga and Velcade as well as biosimilar pressure to immunology drug Remicade weighed on the overall drug sales. However, newer drugs launched in those indications offset the generic competition. We expect continued strong growth from newer drugs, including cancer drugs Darzalex and Erleada as well as immunology drug Tremfya.

Outside the drug group, the medical device and consumer group posted fair growth of 3% and 1%, respectively, and we expect the medical device division to launch several new products to help shore up growth over the long term. Robotic and digital device launches over the next year should move the company into a more competitive position in both orthopedics and soft tissue surgery. On the consumer side, the company’s plans to pull back efforts on less profitable products will weigh on sales but will likely improve profitability.

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