Back on July 25th of last year I wrote an article recommending people ‘ease off’ medical conglomerate Johnson & Johnson. My reasoning was based mostly off valuation. The stock was at multi-year highs and was at a big premium to its average ten-year valuation.

Courtesy of Google Finance. (NYSE:JNJ)

That ended up being a pretty good call. As you can see, since that time shares of J&J have dropped to almost $110, before recovering to a ‘candlestick’ top that hit almost $130.

Earlier on Tuesday management came out with solid first quarter earnings with a slightly-revised guidance for 2017. As the chart above also shows, J&J has been paying the same dividend for four straight quarters, and so it is soon due for a dividend increase. Despite the sizeable drop after reporting earnings, I still think that it is best to be cautious on J&J, and I do not believe that it is too late to take some chips off the table. This article explains why.

No big surprises

Last quarter J&J managed to increase its revenue by 1.6% year-on-year, or 1.2% excluding acquisitions. That came out to 2% when currency headwinds are excluded. Adjusted earnings increased 3.8%, or 7.5% excluding currency headwinds. That is not a bad quarter, and it is more or less within expectations.

The consumer business continues to be very stable, or sluggish, depending on your view. Revenue increased 0.8%, operationally. J&J did acquire U.S. Vogue, Light Mask and NeoStrata, which resulted in beauty revenue increasing 11.7%. Declines in wound care due to competition partially offset growth there.

Pharmaceutical revenue increased only 1.4%. Strong sales in DARZALEX continued its strong uptake in the US and the EU, where J&J launched the drug in 18 countries. IMBRUVICA saw increased uptake globally as well, but that was offset by lower US sales of ZYTIGA and lower INVOKANA sales due to discounts in managed care channels of Medicaid.

J&J also got a positive opinion on DARZALEX which recommends ‘broadening existing market authorization’ for use in a combination to treat multiple myeloma. A new supplemental application was submitted to the FDA for IMBRUVICA for treatment of chronic Graft-Versus-Host Disease after failure of one more lines of systemic therapy.

Operating revenue for medical devices increased a more solid 3.4%, and growth here was brought about partly by the launch of OASYS 1-Day for Astigmatisms, where J&J gained significant share. The Cardiovascular business saw growth of 17% thanks to market share growth of a new contact force sensing catheter.

Guidance remains at 3%-3.5% growth in revenue without acquisitions, but 5.8%-6.8% with acquisitions. With currency that comes out to 4.8%-5.8%. Management expects EPS growth of 4.0%-6.2% when currency factors are factored in. J&J continues to chug along and earnings growth remains solid.

Valuation

My issue with J&J remains one of relative valuation. According to data from FAST Graphs (a research program which I recommend), shares of J&J have averaged 15.3 times over the last ten years. Right now shares trade at 17.8 times trailing earnings, which means it is still overvalued by 17%. That’s fairly high. Even in light of the latest post-earnings drop on Monday, it’s not too late to take some chips off the table when it comes to J&J. The stock is still pretty expensive, in a market that is already at a high valuation.

If you’re interested in Johnson & Johnson, feel free to follow me here on Seeking Alpha. I have been following this stock for quite some time, and will continue to write update articles when doing so is both material and relevant.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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