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J&J (JNJ) Likely to Beat Earnings Estimates in Q3 Again


Johnson & Johnson JNJ, the bellwether of healthcare companies, is scheduled to report third-quarter 2016 results on Oct 18, before the opening bell. Last quarter, the company reported a positive earnings surprise of 4.19%.

J&J has consistently surpassed earnings expectations. The company’s earnings beat expectations in each of the last four quarters, with an average positive surprise of 2.88%. Will J&J be able to beat estimates this time as well?

Let's see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

For the third quarter of 2016, our proven model shows that J&J is again likely to beat earnings estimates because it has the right combination of two key ingredients.

Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +4.88%. This is a meaningful and leading indicator of a likely positive earnings surprise for the shares.

Zacks Rank #3 (Hold): Note that stocks with Zacks Ranks #1 (Strong Buy), #2 (Buy) and #3 have a significantly higher chance of beating earnings.

However, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The combination of J&J’s Zacks Rank #3 and +4.88% ESP makes us reasonably confident of an earnings beat this season.

JOHNSON & JOHNS Price and EPS Surprise

Will the Pharma Segment Continue to Drive Results?

J&J’s Pharmaceutical segment has been performing well and should continue the same this quarter as well on the back of strong sales of new products as well as core growth products. Robust market growth and increased share should boost sales of Simponi and Stelara. Imbruvica should benefit from increased patient uptake. New cancer treatment, Darzalex, has been off to an encouraging start in the U.S. It gained EU approval in May 2016, which should further add to the drug’s sales.

Xarelto and Invokana/Invokamet should keep up their performance thanks to growth in prescription share. Invega Sustenna should also benefit due to strong sales.

However, Olysio sales will keep declining due to increased competition while Invega continues to face a decline in sales due to generic competition.

J&J continues to assume no biosimilar competition for Procrit or Remicade in the U.S. even though the FDA approved a Remicade biosimilar (Inflectra) earlier this April. The company also does not expect generic competition for Zytiga, Risperdal Consta, and Invega Sustenna this year.

The Medical Device business will continue to be affected by soft global market conditions and pricing challenges. The company is working on driving growth in this segment through new product launches and by transforming its commercial models.

Meanwhile, the Consumer business is slowly recovering from the impact of the manufacturing issues that had affected this segment.

The company has been quite active on the deal making front. In Sep 2016, J&J announced its intention to acquire Abbott Laboratories’ ABT Abbott Medical Optics for $4.325 billion in cash. With this proposed acquisition, J&J is looking to strengthen its eye care segment. The acquisition is slated to close in the first quarter of 2017.

In Jul 2016, J&J acquired privately held company Vogue International in a deal worth $3.3 billion in cash. The acquisition is expected to strengthen its position in hair care and contribute to the profitability of the company’s Consumer business.

J&J’s share buyback program (worth up to $10 billion) should boost the bottom line. Currency movement and operations in Venezuela will remain headwinds.

Stocks That Warrant a Look

J&J is not the only company looking up this earnings season. Here are a couple of health care stocks that you may want to consider as our model shows that they too have the right combination of elements to post an earnings beat this quarter.

Amgen Inc. AMGN is expected to report third-quarter results on Oct 26. It has an Earnings ESP of +1.79% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Bristol-Myers Squibb Company BMY has an Earnings ESP of +7.81% and a Zacks Rank #3. It is scheduled to report third-quarter results on Oct 27.

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