Investors have come to expect consistent, steady growth from healthcare giant Johnson & Johnson (NYSE:JNJ), and there are a couple of key reasons to explain why J&J hasn't delivered as of late. One of the reasons is beyond the company's control, and the reason within management's control will take some time to improve upon.
Recent Results
J&J's overall first-quarter sales fell 7.2% to $15 billion, which was made of a 1.2% fall in core sales and 6% negative impact as J&J reported in its first-quarter earnings call that it "continued to experience significant impacts from fluctuating currency exchange rates." The only region to post a positive top-line improvement was Asia-Pacific Africa which was up 3.6%. Reported U.S. sales growth came in relatively weak, falling 5%.
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J&J breaks its sales into three primary product categories. Again, negative currency effects caused reported sales to decline, with medical device and diagnostics the only category to post positive operational growth (up 3.1%). The biggest laggard was the pharmaceutical division as it reported a 10.1% sales decline. Both domestic and international was hurt by generic competition for blockbusters such as Risperdal and Topamax.
The consumer unit also struggled as reported sales fell 8.7%, confirming fears that rivals like Colgate (NYSE:CL) will also see challenging trends in product lines that were expected to be more recession-resistant. Sara Lee (NYSE:SLE) even announced it was considering selling its overseas consumer products businesses as slowing economic growth has called into question their ability to increase shareholder value.
Outlook
Strong expense controls held the fall in net income to a minimum, which ended up falling 2.5% to $3.5 billion. Share buybacks left earnings flat from last year's same quarter at $1.26 per share. This came in above analyst estimates, though J&J still held its full-year guidance steady at $4.45 - $4.55 per share.
Product Diversity
Despite the near-term struggles, J&J's product diversity is still paying dividends. Firms such as Merck (NYSE:MRK) and Eli Lilly (NYSE:LLY) are also dealing with patent expirations in their pharmaceutical businesses, but don't have consumer or medical device segments to lean on until their drug pipelines start to deliver. J&J management is hopeful its own pipeline will eventually bring many drugs to market and will report those that achieve more than $200 million in sales.
Bottom Line
Unfortunately, geographic breadth is proving a detriment as overseas results are being depressed by a strong dollar. This should prove short-lived, but J&J has work to do to convince investors that all three businesses can return to boost sales and earnings growth back into the double digits, something that J&J had done consistently for about a century. (For further reading, see Steady Growth Stocks Win The Race.)
