Analysts View Johnson & Johnson's Organic Growth Guidance As Conservative

Johnson & Johnson JNJ kickstarted the large-cap pharma earnings season Tuesday with forecast-beating first-quarter results. The company narrowed its full-year earnings per share guidance but maintained its sales outlook.

The Analysts

Morgan Stanley analyst David Lewis maintained an Equal-weight rating on J&J and upped the price target from $134 to $145.

Raymond James analyst Jayson Bedford maintained an Outperform rating and nudged the price target higher from $145 to $147.

Morgan Stanley: Guidance Looks Conservative

J&J's upwardly revised organic growth guidance of 2.5-3.5 percent primarily reflects the optimistic outlook for the pharma segment but it looks conservative, Lewis said in a Wednesday note.

The analyst estimates 4.2-percent organic growth in pharma for 2019, which reflects a 2-point deceleration for the remainder of the year.

Lewis named the following as pharma headwinds for the remainder of the year:

• An acceleration in Zytiga declines.
• A moderation in Concerta sales.
• Generic/biosimilar competitive threats to Velcade, which is likely to see patent expiration in April outside the U.S., along with Procrit and Tracleer.
• Greater declines in U.S. Remicade sales.

Balancing out the headwinds, the analyst sees tailwinds from continued expansion in existing franchises like Stelara, Darzalex, and Tremfya, and pipeline contributions from Spravato and Erleada.

"We see our pharma estimates as achievable, if not conservative," Lewis said. 

Notwithstanding the conservative guidance, Morgan Stanley said it prefers to stay on the sidelines due to outsized exposure to pharma, which is facing structural headwinds and talc litigation, rendering a balanced risk-reward profile. 

Raymond James: Valuation Multiples Could Expand

The underlying growth in the first quarter was much better than expected, increasing confidence in Raymond James' estimates, Bedford said in a Tuesday note. 

The analyst noted that the pharma and devices segments saw acceleration in growth that was offset by a deceleration in the consumer segment.

Looking ahead, Bedford said J&J might be pressured by a stiffer forex headwind on revenue growth and the bottom line. Yet better organic growth and a solid first quarter will help the company absorb the incremental headwinds, he said. 

Raymond James models 3-4-percent organic growth over the next two years and made no material changes to its earnings estimates. 

The discount at which J&J shares trade to the diversified peer group and the S&P 500 is warranted, but the multiple has the potential for expansion, according to Raymond James.

The Price Action

After advancing 1.1 percent Tuesday in reaction to the earnings, J&J shares were last seen trading slightly at $137.87 at the time of publication Wednesday. 

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