Why Did Johnson and Johnson’s Stock Go Down Today?

April 15, 2008

Sales were up almost 8%. Profits were up 40%. Earnings beat estimates by 6 cents per share. Why, then, did Johnson and Johnson’s stock (JNJ) go DOWN by half a percent today? The answer lies in the extraordinary chess game that is the stock market.

Just like chess, it’s not enough to see a good move. You have to analyze what the other person is going to do, and analyze what you will do after that move, and what you can do after THAT move, ad infinitum. This leads to the complications that make both chess and stock investing interesting.

Sure, JNJ beat estimates. However, a closer look at the numbers reveals that much of their growth is due to the luck of a weakening dollar. It’s easy to make money selling internationally when your local currency is weak (which is why China keeps the RMB, or “yuan,” at an artificially low rate). Investors are worried that this portends a slowdown to JNJ’s growth when it can’t count on a weak dollar to prop up profits.

Remember that 40% increase in profits from last year? Well, it turns out that not all 40% profit increases are the same. Earnings per share last year were artificially depressed by a 28 cent per share charge due to the acquisition of Conor Medsystems; without that charge, profits are up only 8.6% this quarter.

Thirdly, JNJ has remained cautious with its yearly outlook, leading investors to think that this quarter’s results may be a fluke and hesitant to invest more.

There were also big slowdowns in the sales of many of the pharmaceutical division’s big drug names, such as Duragesic, Procrit and Eprex. The only real blockbuster gainer was Remicade, up 37%, although the company warned that this level sales growth for Remicase is likely a one-time event. Investors are wary of investing in a pharmaceutical company whose pharmaceuticals are not selling that well and are facing more and more generic competition in the coming years.

On that note, however, it looks like JNJ is becoming less and less of a traditional pharmaceutical company (such as Pfizer or Merck) and more of a diversified medical conglomerate. The medical device and consumer products divisions are the ones with the real sales growth lately, and investors who may have bought with the intention of investing in a more pharmaceutically-oriented company may want to get out now (assuming they have been minimizing or ignoring the warning signs of the last few years, such as JNJ’s purchase of Pfizer’s consumer products division).

Of course, with any system as complex as the stock market, it’s impossible to determine the motives behind all the actors involved. That’s what makes it so endlessly interesting - and frustrating - to economists and investors. With today’s example of Johnson and Johnson, we can see how something that looks like great news can turn out to be bad news for the stock price.

As of 15 April 2008, Bill Laboon owns shares of Johnson and Johnson (JNJ).

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