Will Currency Hit Johnson & Johnson's Second Quarter Earnings?
The second quarter season for the health care sector is around the corner with Johnson & Johnson JNJ, one of the most well-known names in the overall health care sector especially the pharma, consumer health care and medical devices segments, reporting results on July 14, before the opening bell.
J&J’s track record has been pretty good over the past few quarters with the company beating earnings estimates in each of the last four quarters. The average earnings surprise over the last four quarters is 4.08%.
Let’s have a look at how things are shaping up for the second quarter results.
Will Pharma Sales Continue to Offset Currency Impact?
Will pharma product sales and newly launched products, which have been driving the company’s performance in the last few quarters, continue to be the driving force in the second quarter or will currency cut into second quarter results?
While the pharma segment is facing challenges in the form of increased competition for hepatitis C virus treatment Olysio and biosimilar competition for Remicade in major EU markets, products like Stelara, Xarelto, Imbruvica and Invega Sustenna should continue performing well.
Other growth drivers include Invokana/Invokamet, Imbruvica and Simponi. Concerta should continue benefiting from therapeutic equivalent reclassification of generic competitors. Imbruvica, Prezcobix and Velcade could bring in additional sales due to label expansions.
Investors will also keep an eye on Zytiga’s performance -- Zytiga saw its market share continue to slip (about 1.2 points on a sequential basis) in the first quarter due to increased competition.
Turning to the Worldwide Medical Devices segment, several markets in this segment have been facing challenges in the form of austerity measures, pricing pressure and a slowdown in elective surgeries, which have all contributed to more tempered growth rates. Performance of the Vision Care business in the first quarter remained disappointing reflecting buying patterns and competitive pricing dynamics.
As far as the Consumer Care segment is concerned, focus will remain on the restoring and re-launch of U.S. OTC products.
Currency will continue to play an important role in second quarter results. First quarter international sales had reflected a 13.2% negative currency impact and J&J had reduced its outlook for the year reflecting the impact of currency movement.
What Our Model Indicates
Our proven model does not conclusively show that J&J will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Negative Zacks ESP: Earnings Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -2.33%.
Zacks #2 Rank (Buy): Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings. The sell rated stocks (#4 and #5) should never be considered going into an earnings announcement.
The combination of J&J’s Zacks Rank #2 and ESP of -2.33% does not conclusively point to a positive surprise on July 14.
Stocks That Warrant a Look
Here are some health care stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.
The Medicines Company MDCO has an Earnings ESP of +125% and carries a Zacks Rank #2. It is expected to report results on Jul 22.
The Earnings ESP for Eli Lilly and Company LLY is +2.70% and it carries a Zacks Rank #3 (Hold). The company is scheduled to release results on Jul 23.
The Earnings ESP for Valeant Pharmaceuticals International, Inc. VRX is +3.25% and it carries a Zacks Rank #3. The company is also scheduled to release results on Jul 23.
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