The third quarter season for the health care sector is round the corner with Johnson & Johnson JNJ, one of the most well-known names in the overall health care sector specially the pharma, consumer health care and medical devices segments, reporting results on Oct 13, 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 2.43%.
Let’s have a look at how things are shaping up for third quarter results.
Will the Pharma Business Continue to Offset Currency Impact?
Will the Pharma segment, which has been driving the company’s performance in the last few quarters, continue to be the driving force in the third quarter or will currency cut into third quarter results?
While products like Stelara, Imbruvica, Xarelto and Invega Sustenna should continue to perform well, Olysio sales will keep declining and Invega has started facing generic competition. Moreover, sales of the company’s SGLT2 inhibitor, Invokana/Invokamet, could be affected by the addition of warnings regarding the increased risk of bone fractures. Zytiga is also facing increased competition and Remicade is being affected by biosimilar competition in Europe.
The Medical Device business has also been under pressure with pricing dynamics in the diabetics market and division care market affecting performance. Moreover, 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.
Slower growth in Europe will also affect results. Meanwhile, the consumer business which is slowly recovering from the impact of the manufacturing issues that had affected this segment, is experiencing market pressure in China where volumes have slowed due to lower demand resulting from shift in consumer behavior and the emergence of new retail channels in the country.
Currency will continue to play an important role in third quarter results. Second quarter sales had reflected a 7.9% negative currency impact.
However, longer-term, Johnson and Johnson should benefit from new product launches – the company is targeting 10 new molecular entity (NME) filings between now and 2019, each of which have blockbuster potential. The company is working on bringing new Medical Device products as well. Johnson and Johnson has also been divesting lower growth assets.
The company’s M&A strategy will be a key focus area on the third quarter call.
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 -1.39%.
Zacks #3 Rank (Hold): 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 #3 and ESP of -1.39% does not conclusively point to a positive surprise on Oct 13.
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.
Valeant Pharmaceuticals International, Inc. VRX has an Earnings ESP of +0.37% and carries a Zacks Rank #3. It will be reporting results on Oct 19.
The Earnings ESP for Eli Lilly and Company LLY is +1.33% and it carries a Zacks Rank #2 (Buy). The company is scheduled to release results on Oct 22.
The Earnings ESP for Amgen Inc. AMGN is +2.95% and it carries a Zacks Rank #1 (Strong Buy). The company is scheduled to release results on Oct 28.
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