Johnson & Johnson JNJ, a healthcare bellwether, will report fourth-quarter 2017 results on Jan 23, before the opening bell. Last quarter, the company reported a positive earnings surprise of 5.56%.

J&J’s shares have gained 28.7% in the past year, outperforming the 21.9% increase witnessed by the industry it belongs to.

Its earnings beat expectations in each of the last four quarters, with an average positive surprise of 3.12%.

Let's see how things are shaping up for this announcement.

Factors to Consider

We believe that strong performance of the pharmaceutical segment as well as positive contribution from acquisitions like Actelion and Abbott Medical Optics should pull up J&J’s top line in the fourth quarter. However, higher investments in product launches may put pressure on profits as in the third quarter.

J&J’s domestic Pharma segment sales decelerated in the first half of 2017.  However, sales growth accelerated in the third quarter and we are likely to see a continuation of the positive trend in the fourth quarter and probably in 2018. We believe that new products in all segments, label expansion of drugs like Imbruvica, Xarelto, Stelaraand Darzalex and meaningful contribution from Swiss biotech Actelion, which J&J bought in June 2017 will support the top line.

However, biosimilar competition is expected to hurt sales of key arthritis drug, Remicade outside the United States.

Two new drugs were approved last year. These include Tremfya (guselkumab) in the United States (July) as well as in the EU (November) for plaque psoriasis and the first dual treatment for HIV, Juluca (dolutegravir + rilpivirine) in partnership with GlaxoSmithKline GSK in the United States (November). Juluca is under review in the EU.

Regarding Tremfya, J&J said on the third-quarter conference call that it has been well received by physicians and patients. The drug is likely to contribute to sales in the soon-to-be reported quarter. We expect an update on the commercialization plans of Juluca on the fourth quarter conference call.

In the Medical Devices segment, sales will continue to gain mainly from the inclusion of Abbott Medical Optics acquisition. Diabetes Care unit is however expected to remain weak.

The hurricanes in Texas, Florida and Puerto Rico hurt sales growth in the last reported quarter due to lost surgery days. On the third-quarter call, the company had said that though supply disruptions were not anticipated, it was not clear at that time if the surgical procedures missed in the third quarter could be recovered in the fourth. Some pricing issues in India and system outage in Europe also hurt sales to an extent. It remains to be seen if the issues were resolved this time around.

In the Consumer segment, global consumer category slowdown across many of the company’s markets will continue to hurt sales. However, recent acquisitions as well as new products are likely to provide some support.

What Our Model Indicates

Our proven model does not conclusively show that J&J is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Its Earnings ESP is -0.09%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: J&J’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

A couple of stocks in the large-cap pharma sector that have a positive Earnings ESP and a favorable Zacks Rank are:

Merck & Co., Inc. MRK with an Earnings ESP of +0.83% and a Zacks Rank #3. The company is scheduled to release results on Feb 2.

Pfizer, Inc. PFE is scheduled to release results on Jan 30. The company has an Earnings ESP of +0.30% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Johnson & Johnson Price and EPS Surprise

Johnson & Johnson Price and EPS Surprise | Johnson & Johnson Quote

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