Johnson & Johnson Q2 Earnings Preview: Scrutinizing Its Earnings Quality

Core Viewpoint - Johnson & Johnson (JNJ) is set to release its Q2 2024 earnings, with analysts expecting adjusted EPS of $2.69, reflecting a 3.9% decline year-over-year. The company has a strong track record of meeting earnings estimates, but significant deviations between reported and adjusted earnings raise questions about earnings quality and management practices [1][2][13]. Earnings Expectations - Analysts project JNJ's full-year adjusted EPS to be $10.54, a 6.3% increase year-over-year, leading to a forward P/E ratio of 14.2. JNJ management has provided a slightly higher midpoint guidance of $10.65, indicating a 7.4% growth [2][13]. - The company has experienced minimal earnings revisions over the past six months, which is typical for JNJ [2]. Earnings Quality and Adjustments - Over the past decade, JNJ's adjusted EPS has averaged 46% higher than reported EPS, with significant adjustments noted in years such as 2023 (+91%), 2022 (+51%), 2019 (+54%), and 2017 (+1,453%) [5][13]. - Major adjustments in 2023 included litigation costs (nearly 50% of total adjustments) and $4.5 billion in amortization of intangible assets. The company also adjusted for COVID-19 vaccine costs, which some analysts find inappropriate [7][8][13]. Impact of Kenvue Split-off - Concerns about JNJ's diversification arose following the split-off of its consumer healthcare division, Kenvue Inc. However, the level of diversification is not believed to be materially impaired, although earnings volatility may have increased [2][13]. Future Outlook - The decline in estimated amortization expenses for the coming years suggests a potentially weak pipeline for JNJ, which could impact future earnings power [8][13]. - Despite the adjustments, JNJ's strong balance sheet and credit rating (Aaa) indicate that the earnings adjustments are unlikely to stem from deeper financial issues [13].