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Johnson & Johnson (NYSE: JNJ ) announces earnings on Tuesday before market open. The New Brunswick, New Jersey-based healthcare company has become one of the strongest, longest-running brands in existence.
However, challenges with drug patent expirations have blunted earnings growth in JNJ stock. This has left JNJ trading in a range for more than two years. Though this report will probably not deliver any meaningful surprises, investors still need signs that earnings growth will resume in Johnson & Johnson stock to break the equity out of its range.
Pharma Will Drive the Report on JNJ Stock
Tuesday's announcement will kick off earnings season for the pharma industry. Wall Street forecasts Q1 earnings to come in at $2.06 per share, matching the number for Q1 2018. They also predict revenues of $19.6 billion, a 2% decrease from the $20.01 billion announced in the same quarter last year.
Consumers know JNJ best for its consumer health products. However, many often forget that medical devices and pharma each drive greater shares of the company's revenue. It is pain in the pharma division that's driving the predicted revenue decline.
Sales of Simponi/Simponi Aria and Xarelto fell in the fourth quarter. The company has also cited alternatives to Velcade, Tracleer and Zytiga in explaining revenue declines. By no means is JNJ stock the only pharma stock to struggle with new competition. AbbVie (NYSE: ABBV ) faces the same issue with Humira. Also, Pfizer (NYSE: PFE ) will see its patent protection go away in its blockbuster drug Lyrica this summer.
Patent expirations have long affected pharma stocks, and this may have helped to trap JNJ stock in a range. Since early 2017, JNJ stock has traded near the $120 per share to $150 per share range. Now, its forward P/E ratio comes in below 15. In the past few years, JNJ's forward P/E has typically been in the high teens to the low 20s.
The stagnant earnings may explain the modest discount in JNJ stock. For this reason, I think investors will focus on guidance in the upcoming report. As of now, Wall Street expects 2019 earnings to increase by 4.6%. In all likelihood, investors will need to at least see that figure to move JNJ higher.
JNJ Stock Retains Numerous Advantages
Fortunately, some tailwinds could help JNJ stock. Traders should remember that JNJ stock usually beats estimates, at least on earnings. For that reason, I would expect the earnings number to come in higher than $2.06 per share.
Also, JNJ stock should continue to deliver the stability for which the public knows the company. For now, JNJ and Microsoft (NASDAQ: MSFT ) are the only two U.S. companies that maintain a AAA credit rating. Debt levels have fallen over the last year, so I see no change in that status coming.
Also, attention should shift back to the dividend in the coming days. The company traditionally announces a hike to its JNJ stock dividend soon after the Q1 report. They have increased the payout every year since 1963. Hence, I do not see the company breaking its 56-year streak of payout increases. The only question remains how much of a dividend hike JNJ gives.
Johnson & Johnson stock currently pays 90 cents per share each quarter, a yield of about 2.65%. In the past, earnings growth has had little obvious effect on the size of the increase. While I do not foresee any surprises, the dividend boost could help JNJ stock to recover.
Concluding Thoughts on JNJ Stock
Going into earnings, investors need to see guidance that will help break JNJ stock out of its range. Johnson & Johnson usually beats earnings. However, patent expirations on key drugs have led to modest declines in revenue. They may also explain why JNJ has traded in a range for the last two years.
However, conditions increasingly point to the potential for a rising stock price. The P/E ratio has fallen below company averages. Moreover, analysts forecast earnings increases in later quarters and for the overall year. If company guidance confirms those predictions, JNJ stock should rise. An expected dividend hike in the coming weeks should offer further help.
JNJ stock trades at about $135 per share now. If guidance affirms or exceeds profit growth predictions, I think it could help take JNJ past $150 per share sooner rather than later.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You canfollow Will on Twitterat @HealyWriting .
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