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Johnson & Johnson (JNJ - Analyst Report) is scheduled to report results for the third quarter of 2013 before the opening bell on Oct 15, 2013.

Last quarter, Johnson & Johnson posted a 5.71% positive surprise. We expect the company to beat expectations in the third quarter as well.

Why a Likely Positive Surprise?

Our proven model shows that Johnson & Johnson is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: The Expected Surprise Prediction or ESP (Earnings ESP) which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +0.76%. This is meaningful and a leading indicator of a likely positive earnings surprise.

Zacks Rank #3 (Hold): Note that stocks with a Zacks Rank #1, #2 and #3 have a significantly higher chance of beating earnings estimates. We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revision momentum.

The combination of Johnson & Johnson’s Zacks Rank #3 (Hold) and a positive ESP of +0.76% make us confident of an earnings beat on Oct 15.

What is Driving the Better-than-Expected Earnings?

We believe the diversity and strength of the company’s underlying businesses will continue to provide solid growth in future. Johnson & Johnson has delivered positive earnings surprises in the last four quarters with an average beat of 3.43%.

Johnson & Johnson has been trying to offset the declining sales of some of its important products by bringing in new products through in-licensing deals and acquisitions. In 2012, Johnson & Johnson acquired erstwhile Synthes Inc. to boost its medical device portfolio. The products of both the companies should complement each other. Hence, we are positive on the Synthes deal which is expected to be accretive to earnings.

On the other hand, Remicade, the best-selling drug at Johnson & Johnson, continues to maintain momentum driven by strong demand in the rheumatoid arthritis market, as well as significant unmet need in the Crohn’s disease and ulcerative colitis markets. Remicade generated sales of $3.3 billion in the first half of 2013, up 7.5% year over year.

While we expect the company to continue facing headwinds in the form of EU pricing pressure, manufacturing issues and U.S. healthcare reform, we believe Johnson & Johnson’s diversified business model, lack of cyclicality and strong financial position will enable the company to pave its way through tough situations.

Other Stocks to Consider

Here are some other stocks you may want to consider as our model shows that these also have the right combination of elements to post an earnings beat this season:

Eli Lilly and Company (LLY - Analyst Report) has Earnings ESP of +4.85% and holds a Zacks Rank #3 (Hold). Eli Lilly will be reporting third quarter earnings on Oct 23.

Biogen Idec. (BIIB - Analyst Report) has Earnings ESP of +0.91% and holds a Zacks Rank #2 (Buy). Biogen will be reporting third quarter earnings on Oct 28.

Merck & Co (MRK - Analyst Report) has Earnings ESP of +1.15% and holds a Zacks Rank #3 (Hold). Merck will be reporting third quarter earnings on Oct 28.

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