To the surprise of investors and even speculators, the stock of consumer and pharmaceutical product manufacturer Johnson & Johnson (NYSE: JNJ) lost about 3% to close at $121.72 on April 18th. The steep drop in the share price was mainly due to the fiscal 2017 first-quarter revenue that came below Wall Street’s expectations. However, a second look at the financial statement would reveal that the stock is trading at an attractive valuation and the dip should be used as an opportunity to take a long position in the stock, as explained below.
The New Brunswick, New Jersey-based company reported fiscal 2017 first-quarter revenues of $17.766 billion, up 1.6% from $17.482 billion in the similar period last year. The reported revenues missed the Street consensus of $18.01 billion.
Net earnings in the recent quarter declined marginally to $4.422 billion or $1.61 per share, from $4.457 billion or $1.59 per share in the similar period last year. Excluding charges, the 1Q17 non-GAAP earnings increased to $5.04 billion or $1.83 per share, from $4.854 billion or $1.73 per share in the first quarter of 2016. The non-GAAP earnings surpassed Wall Street estimates of $1.77 per share.
At the outset, the results look unimpressive. However, it should be noted that the poor revenue growth was mainly due to a slight weakness in US sales. While the domestic sales grew 0.6% y-o-y to $9.38 billion, the international sales jumped 3.6% to $8.39 billion. The $30 billion acquisition of Swiss biopharmaceutical company Actelion, expected to complete in the current quarter, will certainly bolster the revenues of the company. That is one of the reasons for raising the earnings and revenue guidance for FY 2017.
The company stated that it now expects FY 2017 earnings to range between $7 and $7.15 per share, compared with a January forecast of $6.93 to $7.08 per share. Similarly, JNJ also raised the FY 2017 revenue outlook to a range of $75.4 billion to $76.1 billion, from the prior guidance range of $74.1 billion to $74.8 billion.
The company has an impressive track record of 33 years of consecutive earnings growth. Additionally, it holds the record for 54 years of consecutive dividend increases. Apart from Microsoft, it is the only company to have a AAA rating from Standard & Poor’s. Furthermore, it is one of those few companies which had reported an earnings growth during the 2008-2009 financial crisis. Thus, fundamentally, the stock is expected to reverse course in the days to come.
The price chart indicates that the stock has broken the major support level of 124 last week. On the downside, the next major support exists at 119.30. The stock is expected to reverse after reaching that level. The argument for a trend reversal is also supported by the stochastic oscillator, which is in the oversold region. So, it would be wise on the part of a trader to initiate a long position in the stock.
The equivalent of a long position can be opened in a binary market by purchasing a call option contract. The contract should be picked when the stock trades near $120.50. Choosing an expiry period of one week for the call option would ensure that the trader has higher chances of finishing the trade in the money.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
