A Financial Revolution 

January 25, 2006
JNJ Reports Earnings and Fails to Throw Money Down a Hole

Following up on my analysis of JNJ, there were three important events today. First, JNJ reported mixed earnings for Q4. Compared to Q4 2004, earnings increased 9% but revenues decreased by 1%. For the year, earnings increased by 12% while revenues increased 6.7%. The decrease in Q4 revenues was due to currency effects (approximately 2% of revenues.) The consumer segment and medical devices segment led the growth – 9.2% and 13.1% revenue growth for the year. The pharmaceutical segment increased by only 0.9% for the year. The result: investors fled and the stock reached 52-week lows, falling by 3%.

In other news, it looks like JNJ will lose the bidding war for Guidant (GDT). Boston Scientific (BSX) has probably overreached and is overpaying for Guidant. BSX management estimates that the deal will dilute earnings for more than 5 years. JNJ will wind up with $705 million if GDT walks away from the deal. Expect JNJ to look for another candidate – St Jude Medical (STJ) – or possibly a cooperative agreement with Medtronic (MDT). [Update: STJ's shares are down almost 7% on Wednesday due to lower earnings resulting from acquisition expenses.]

Finally, the FTC approved JNJ’s purchase of Animas, a maker of insulin pumps and diabetic supplies. The Animas deal will be a boost to JNJ’s product mix and bottom line. (Diabetes afflicts 7% of the US population. Unfortunately, the numbers are growing.)

While I believe JNJ was a good long-term deal at last week’s prices, I think it’s even better today. It might, however, be a good idea to wait for the price to stabilize before jumping in.

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