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Johnson & Johnson (JNJ - Analyst Report) posted third quarter 2011 earnings (excluding special items) of $1.24 per share, three cents above the Zacks Consensus Estimate of $1.21 and 0.8% above the year-ago earnings of $1.23.

Johnson & Johnson’s revenues for the reported quarter increased 6.8% year-over-year to $16 billion. Revenues were in-line with the Zacks Consensus Estimate. Operational factors and foreign exchange movement favorably impacted sales by 2.6% and 4.2%, respectively.

Including one-time items, Johnson & Johnson reported earnings of $1.15, 6.5% below the year-ago earnings of $1.23.

The Quarter in Detail

Third quarter sales declined 3.7% in the domestic market. Meanwhile, international sales increased 16.4%, consisting of 8.3% operational growth and 8.1% favorable currency impact.

The Medical Devices & Diagnostics segment posted sales of $6.3 billion, up 6.1% year-over year. Operational factors and foreign exchange movement positively impacted Medical Devices & Diagnostics segment sales by 1.7% and 4.4%, respectively. Sales in the domestic market declined 0.7% to $2.8 billion; international market sales increased 12.3% to $3.5 billion. Favorable currency movement helped drive international sales.

Primary contributors to growth included Biosense Webster's electrophysiology business, Diabetes Care, Vision Care, DePuy, Ethicon's surgical care products and Ethicon Endo-Surgery's minimally invasive and advanced sterilization products. The Cardiovascular Care franchise continued to record a decline in sales with performance being impacted by competitive pressures in the drug-eluting stent market.

Pharmaceutical segment sales increased 8.9% year-over-year to $6 billion (operational growth of 4.9% and positive currency impact of 4%). Sales in the domestic market declined 6.1% to $2.9 billion whereas the international market grew 27.5% to $3.1 billion. US sales were impacted by the genericization of Levaquin. This was partially offset by strong performances of recently launched products like Zytiga, Stelara, Simponi and Invega Sustenna. Johnson & Johnson also recorded incremental sales due to the amendment of its distribution agreement with Merck (MRK - Analyst Report) for Remicade.

The Consumer segment recorded revenues of $3.7 billion in the reported quarter, up 4.9% from the third quarter of 2010. While operational factors increased sales in the segment by 0.5%, foreign currency movement favorably impacted sales by 4.4%. Sales in the domestic market declined 4.5% year-over-year to $1.2 billion, whereas the international market recorded a 10.1% year-over-year increase to $2.5 billion.

The series of OTC product recalls and the suspension of manufacturing at Fort Washington facility hampered US sales. Third quarter 2011 OTC pharmaceuticals and nutritional sales declined 5% with US sales declining 24.2% mainly due to supply constraints.

Earnings Guidance Adjusted

Following the release of third quarter results, Johnson & Johnson increased the lower end of its 2011 adjusted earnings guidance by five cents to $4.95 - $5.00 per share (old guidance: $4.90 - $5.00 per share). The Zacks Consensus Estimate for 2011 currently stands at $4.96 per share.

Neutral on Johnson & Johnson

We currently have a Neutral recommendation on Johnson & Johnson. The stock carries a Zacks #3 Rank (short term Hold rating). Our Neutral recommendation on the stock is based on the belief that Johnson & Johnson’s diversified business model, lack of cyclicality and strong financial position will help it in tough situations. 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. We believe the diversity and strength of Johnson & Johnson’s businesses will continue to provide strong growth in future.

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