What do I think of when I think of Johnson & Johnson (JNJ) ? Basically, initial thoughts move to a stable firm that offers broad exposure for investors to both the pharmaceutical space, as well as the consumer products space, not to mention the attractive dividend. I always look for that. On Tuesday morning the firm reported to the street their fourth quarter results. On an adjusted basis, "Johnny John" as human traders often refer to this name, beat expectations for both EPS and revenues. The firm grew revenue slightly year over year despite a fairly nasty 4.7% negative impact based on currency valuations.
Pharmaceutical sales led all business lines, with 12.4% growth globally, though sales across all business lines performed at least fairly well internationally. There were two sticking points that made the market difficult for JNJ shareholders in early trade.
One... Guidance. The firm guided full year 2019 revenue toward a range of $80.4 billion to $81.2 billion, and non-GAAP EPS toward something in between $8.50 to $8.65. These projections were less that the industry had hoped for. Consensus view had been for EPS at the higher end of that range on revenue of more than $82 billion.
Two... Litigation Expense. The number just jumps right at the reader off of the balance sheet. For the fourth quarter, this line item cost the firm $1.288 billion, up from $645 million for Q4 2017. The horrific Q4 total forced that line for the past 12 months all the way up to $1.991 billion. Why? Several lawsuits have been brought that the firm's talcum powder contains asbestos. To be fair, the firm claims that the powder is asbestos free, and safe to use.
While the ongoing litigation could be seen as a deterrent to investment, and it certainly slows my enthusiasm, I think the more interesting news story regarding JNJ actually broke last week ahead of earnings. What I refer to is the study that Johnson & Johnson will enter into later this year in cooperation with Apple (AAPL) . Where this goes is the use of an Apple Watch (Series 4) to detect Atrial fibrillation (AFib). Symptomatic of AFib is an irregular heartbeat that can result in stroke. Accelerating diagnosis could save lives. An estimated 33 million patients globally suffer from this condition.
Just FYI... this is in addition to an ongoing collaborative study launched in late 2017 between Apple and Stanford University School of Medicine, also centered around collecting data on irregular heart beats. Is this turning into an Apple article? I did take down about half of my Apple long last week, but this is interesting stuff, and may be where the real future of Apple's service-based revenue is derived from. Music? iCloud? Apple TV? I don't know. How does staying alive sound?
Trade Ideas (minimal lots)
Maybe if you're like me, you think that Apple AAPL is cheap, but perhaps sans a positive resolution on trade with China, not ready to pop. If you also think that JNJ is relatively cheap, as both of these names trade at forward looking PE ratios well below not only the broader marketplace, but their individual industry grouping as well, on top of nice dividends... maybe a trader might want to expose themselves to possible equity risk at a discount, and get paid to do it. Maybe. Keep in mind that Apple reports next week. That trader could...
- Sell one AAPL February 1st $150 put (Last: $2.20)
- Sell one JNJ April 18th $120 put (Last: $2.10)
Net Credit: $4.30... That's $430 up front.
Worst Case: Trader ends up long 100 shares of AAPL by next Friday at a net basis of $147.80. and long 100 shares of JNJ in April at a net basis of $117.90, with those stocks trading lower. Of course the trader would then sell calls against these positions at the time that the puts were exercised.