Shares of Johnson & Johnson (NYSE:JNJ) have fallen slightly despite the company taking a double hit on its third quarter earnings. J&J reported earnings per share (EPS) of $2.55 on revenue of $23.79 billion. This beat analysts’ forecast for earnings per share of $2.49 on revenue of $23.43 billion. However, the EPS figure was 1.9% lower than in the same quarter of the previous year.
But the stock is down about 0.5% in late trading as a result of the company’s guidance. For the full year 2022, the company is also lowering its expectations for the rest of the year. J&J now says it expects earnings per share to reach a midpoint of $10.05 with midpoint sales of $93.3 billion. Analysts expected $10.03 earnings per share and $94.85 billion.
The company cited a stronger dollar decreasing the value of its international sales as the reason for the tighter forecast.
To be fair, if J&J were to hit the midpoint of its earnings forecast, it would be a 7% increase from 2021. That’s not bad at a time when an earnings recession is forecast. And JNJ stocks are seen as a defensive game that has typically performed well in bear markets. But there is one problem that makes longer-term forecasts uncertain.
Balancing between alpha and beta
Like most industries, investing has its own language. Two common terms or Alpha and Beta. Alpha refers to finding profit in the market. For obvious reasons, traders and investors are looking for companies with a consistent track record of positive (and growing) earnings and earnings. These stocks are in demand because they are likely to outperform the market.
Beta, on the other hand, is a measure of how a stock is performing relative to the broader market. High beta stocks are considered more volatile than the overall market. This means that when the market is up, these stocks are usually higher. But when the market falls, these stocks tend to fall more than the broader market.
Conversely, a stock with a low beta is one with less dramatic price swings. This means it has higher highs during a bull market; but it will also have lower lows – which can help investors manage risk during a bear market.
Johnson & Johnson is squarely in the low beta category. The question investors are weighing is whether the company will generate enough income to be an investment in this bear market.
Is Kenvue the Band-Aid the Company Needs?
An unsolved problem for Johnson & Johnson is the announced spin-off of its consumer division. The new company, to be called Kenvue, will house some of the company’s iconic brands, such as Tylenol, Band-Aid and Johnson’s Baby Powder.
In itself, the spin-off is a non-event. In recent years, Abbott labs (NYSE:ABT) spin-off AbbVie (NYSE:ABBB) and Kraft Heinz (NASDAQ:KHC) made a similar move with Mondelez (NASDAQ:MDLZ). And the company says the reason behind the move is that the consumer health market is different from the company’s other core businesses.
And to be fair, the consumer products division posted a decline in sales in the current quarter. This is due to several factors, including pressure from private label brands in the space.
Still, the products that become part of Kenvue accounted for nearly $15 billion ($14.6) in revenue, which was 16% of the company’s total revenue. And the effect of that is already being implied as the company announced it will be cut some jobs as it shrinks from three business units to two.
Is JNJ Stock a sale?
I will doubt this for a while. It is NOT a sale. Especially when you consider that the company is a dividend king that has increased its dividend for 60 consecutive years. At a time when inflation is affecting our portfolios, that’s not something to ignore.
But it remains to be seen how the company will make up for the revenue it loses with the Kenvue spin-off. If that worries you, there are other dividend stocks that can do the same job. But if you currently own JNJ stock, there is no reason to sell. The stock will likely still be a safe haven in the current bear market.