Investors Sold Johnson & Johnson For All the Wrong Reasons

Source: Johnson & Johnson.

Yet it's more than just a currency faux pas . J&J has been a busy bee on the acquisition and divestment front, acquiring Alios BioPharma and divesting its Ortho-Clinical Diagnostics business in June. These purchases and sales can create "holes" in J&J's results that aren't actually there. For instance, once Ortho-Clinical was sold J&J could no longer count on its revenue to boost its medical device and diagnostic segment. Does this mean J&J's 1.6% operational decline in its medical device unit for the year is representative of a weak medical device environment? Not quite. If you remove the one-time effects of acquisitions and (in this case) divestitures and compare the apples to the other apples, J&J's medical device segment actually grew by 1.6% globally in 2014.

"Competition is eating away at J&J"

With Johnson & Johnson's pharmaceutical segment packing nearly all of its growth and margin punch in recent years, there's been concern among investors that competition against prostate cancer drug Zytiga and hepatitis C therapy Olysio could dampen J&J's pharma sales. What we saw in Q4 was exactly that, as J&J's pharmaceutical sales growth "slowed" to 13.9% in Q4. It was hit especially hard by the sales drop in Olysio, which dropped to $321 million from $796 million in the sequential third quarter.

But guess what -- this isn't a surprise! Johnson & Johnson has been warning investors for months that the emergence of Gilead Sciences ' Sovaldi and Harvoni, as well as AbbVie 's Viekira Pak, would result in a substantial drop in Olysio sales. Look beyond Olysio, which is what CEO Alex Gorksy has been trying to get investors to do for months, and you'll see plenty of strong growth prospects.

Source: Johnson & Johnson.

For instance, Simponi and Stelara delivered currency-adjusted global sales growth of 42% and 34%, respectively. More importantly, Zytiga grew despite strong clinical results by competing drug Xtandi from Medivation and Astellas Pharma in metastatic castration-resistant prostate cancer. Xtandi has moved into direct competition with Zytiga for pre-chemo and post-chemo treatment of mCRPC, and still Zytiga sales grew by a currency-adjusted 26% year-over-year. Xarelto was another solid performer, with sales rising by 58% to $428 million for the quarter.

Although no specific figures were mentioned, investors should also note that "Other Oncology" segment revenue more than doubled to $199 million from $94 million in the year-ago period. This segment is where its collaboration revenue with potential blood cancer blockbuster Imbruvica lies.

Now, did someone say something about competition eating away J&J's sales?

"Johnson & Johnson's 2015 EPS forecast didn't impress"

Looking ahead, Johnson & Johnson issued full-year EPS guidance of $6.12 to $6.27 for fiscal 2015. By comparison, Wall Street had been expecting $6.14 in EPS for fiscal 2015, so J&J didn't exactly impress analysts or investors.

While that may be the case, Johnson and Johnson is notorious for underpromising and overdelivering. Over the past 12 quarters J&J has topped Wall Street's adjusted EPS figures how many times? That's right, 12! The majority of the time J&J absolutely crushed expectations by between $0.04 per share and $0.11 per share. In Q4 J&J "only" beat by $0.02, so are we really going to punish the company for only modestly embarrassing analysts once again?

Additionally, the midpoint of Johnson & Johnson's earnings guidance calls for roughly $6.20 in EPS, or a 9% increase from fiscal 2014, despite challenging sales expectations, tied primarily to a strengthening U.S. dollar. You go find me a handful of $284 billion conglomerates growing their bottom line at 9% per year with major currency headwinds. My inclination is you'll find very, very few!

Here's how I see it

When I look at Johnson & Johnson I see three distinct businesses performing at or well above par.

Its consumer products business delivered 1% currency-adjusted growth, with its over-the-counter products like Tylenol and Motrin carrying the bulk of the weight. This is never going to be a high-growth segment for J&J. But what it does provide is a foundation for strong pricing power and predictable cash flow that's helped J&J to 52 straight annual dividend increases and a three-plus decade streak of increasing year-over-year adjusted EPS.

Source: Johnson & Johnson.

J&J's medical device segment grew by an aforementioned 1.6% when adjusted for negative currency effects and should continue to benefit from its push into emerging markets. I suspect J&J's medical device segment will really reap some nice benefits when questions and concerns surrounding Obamacare begin to die down in a year or two. Uncertainties surrounding the new law have tightened insurer and hospital budgets, but once we have better clarity on how Obamacare will affect these businesses, we should see a steady and long-term increase in medical device and diagnostic sales.

Lastly, J&J's pharmaceutical segment is on fire. Even with Olysio's sales shrinking (as expected), J&J's oncology and neuroscience products are only strengthening. This is the bread and butter segment for J&J, and once Imbruvica sales really kick into high gear J&J shareholders could see EPS gallop higher.

Long story short, I personally feel sorry for those who let their J&J shares go for $100 or $101 yesterday. This is a fantastic company with a long-term oriented CEO leading the charge, and I suspect it has a pretty good chance of heading even higher.

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The article Investors Sold Johnson & Johnson For All the Wrong Reasons originally appeared on

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong , and check him out on Twitter, where he goes by the handle @TMFUltraLong .The Motley Fool owns shares of, and recommends Gilead Sciences and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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