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Here’s Why Shares of Johnson & Johnson Are Climbing

January 26, 2016

Johnson And Johnson's Buys Guidant CorpJohnson And Johnson's Buys Guidant Corp
Johnson & Johnson products.Photogrpah by Chris Hondros — Getty Images

Johnson & Johnson (JNJ) on Tuesday reported higher-than-expected quarterly earnings, helped by lower taxes and cost cuts, and gave a 2016 profit outlook slightly above Wall Street’s.

Shares of the diversified health care company rose nearly 3% in morning trading as investors shrugged off fourth-quarter sales and a 2016 revenue outlook that were both below analysts’ estimates.

The strong U.S. dollar and disappointing demand for consumer products weighed on results, and analysts said J&J would probably rely on more cost cuts in 2016 to meet its earnings forecast.

In a conference call with analysts, CEO Alex Gorsky said the company was interested in dealmaking within its main consumer, medical device, and pharmaceuticals segments, although it believes valuations of potential acquisition targets were inflated in 2015.

“We will continue to be very active in the M&A area,” he said, noting that J&J in recent years had derived about half its revenue from acquired products.

J&J will also consider buying businesses outside its current three main product areas, Gorsky said.

The company has pursued fairly small “tuck-in” acquisitions in recent years as some other large health care companies struck big deals, most notably Pfizer (PFE) planned $160 billion acquisition of Allergan (AGN).

 

Gorsky said J&J was “engaged and involved” last year in studying potential acquisitions even though it did not announce major deals.

“Smaller tuck-ins are, frankly, more straightforward to get done, but we won’t shy away from large” deals, Gorsky said.

J&J’s fourth-quarter sales fell 2.4% to $17.81 billion, below the analysts’ average estimate of $17.88 billion, according to Thomson Reuters I/B/E/S.

The company forecast 2016 sales at $70.8 billion to $71.5 billion. Analysts on average were expecting $71.88 billion.

J&J said it expected earnings of $6.43 to $6.58 per share for 2016, excluding special items. Wall Street was expecting $6.38.

Jefferies analyst Jeffrey Holford said J&J’s profit outlook included about $200 million of additional cost savings providing a lift of about 6 cents per share.

Fourth-quarter net income rose about 28% to $3.22 billion, or $1.15 per share, from a year earlier, when it took special charges of about $1.4 billion.

Excluding restructuring charges and other items, J&J earned $1.44 per share, topping the analysts’ average estimate of $1.42.