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Johnson & Johnson (JNJ - Analyst Report) posted fourth quarter 2011 earnings (excluding special items) of $1.13 per share, three cents above the Zacks Consensus Estimate of $1.10 and 9.7% above the year-ago earnings of $1.03.

Johnson & Johnson’s revenues for the fourth quarter increased 3.9% year-over-year to $16.3 billion. Revenues were in-line with the Zacks Consensus Estimate. While operational factors favorably impacted sales by 4%, currency fluctuations had a negative impact of 0.1%.

Including one-time items, Johnson & Johnson reported fourth quarter earnings of 8 cents, 88.6% below the year-ago earnings of 70 cents.

Full year 2011 earnings came in at $5.00, 5% above the year-ago earnings of $4.76 per share and 4 cents above the Zacks Consensus Estimate. Earnings came in at the top end of the company’s guidance of $4.95 - $5.00 per share. Meanwhile, revenues came in at $65 billion, up 5.6% from the year-ago period and in-line with the Zacks Consensus Estimate and the company’s guidance.

Including one-time items, Johnson & Johnson reported 2011 earnings of $3.49, down 27% from the year-ago period.

The Quarter in Detail

Fourth quarter sales declined 3.4% in the domestic market. Meanwhile, international sales increased 10.2%, consisting of 10.4% operational growth and 0.2% negative currency impact.

The Medical Devices & Diagnostics segment posted sales of $6.5 billion, up 2.7% year-over year. Operational factors and foreign exchange movement positively impacted Medical Devices & Diagnostics segment sales by 2.4% and 0.3%, respectively. Sales in the domestic market declined 0.4% to $2.9 billion; international market sales increased 5.2% to $3.6 billion.

Primary contributors to growth included Biosense Webster's electrophysiology business, Diabetes Care, Vision Care, 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. Johnson & Johnson has exited the drug eluting stent market.

Pharmaceutical segment sales increased 6.7% year-over-year to $6.1 billion (operational growth of 6.6% and positive currency impact of 0.1%). Sales in the domestic market declined 8.3% to $2.9 billion whereas the international market grew 25.2% to $3.2 billion.

US sales were impacted by the genericization of Levaquin. This was partially offset by strong performance 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 1.6% from the fourth quarter of 2010. While operational factors increased sales in the segment by 2.7%, foreign currency movement negatively impacted sales by 1.1%. Sales in the domestic market increased 2.4% year-over-year to $1.2 billion, whereas the international market recorded a 1.2% year-over-year increase to $2.4 billion.

The series of OTC product recalls and the suspension of manufacturing at Fort Washington facility hampered US OTC/Nutritionals sales. Fourth quarter 2011 OTC/Nutritionals sales declined 2.9% in the US mainly due to supply constraints.

2012 Earnings Guidance Disappoints

Following the release of fourth quarter results, Johnson & Johnson provided its outlook for 2012. The company expects earnings of $5.05 to $5.15 per share, reflecting 3.5% -5.5% operational growth. Currency fluctuations are expected to have a negative impact of about 2.5%. 2012 earnings guidance is well below expectations with the Zacks Consensus Estimate currently standing at $5.22 per share.

Neutral on J&J

We currently have a Neutral recommendation on Johnson and Johnson, which carries a Zacks #4 Rank (short-term Sell rating). With the company guiding below expectations for 2012, we expect the stock to be under pressure in the near-term.

Our long-term Neutral recommendation on the stock is based on the belief that Johnson and Johnson’s diversified business model, lack of cyclicality and strong financial position will help it in tough situations. Moreover, Johnson & Johnson has been signing deals, which should help boost its revenues in the long term.

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