Wednesday, April 16, 2008

Johnson & Johnson – JNJ

In typical fashion Johnson & Johnson announced that they have once again beat analyst consensus earnings estimates. Their quarterly earnings came in at $1.26/share, 6 cents above analyst estimates of $1.20/share. However, their two major businesses, pharmaceuticals and medical devices, would have experienced declines had it not been for the weak American dollar.

The recent increase in earnings due to currency is viewed as a negative by many analysts however, as an investor it helps to reaffirm one aspect of my investing strategy. One of the criteria that I used to select the U.S names in my portfolio is their international exposure. Over a year ago when I first initiated a position in JNJ I stated that one of the reason that I bought was that 44% of their sales were from outside of North America which would act as a built-in currency hedge. It works like this: JNJ reports their earnings in U.S dollars so the 44% of their revenue that was generated outside of the U.S. has to be converted back to American dollars for accounting purposes. This of course would inflate their international earnings as the U.S dollar falls and conversely shrink them as the U.S dollar rises.

74 comments:

MG said...

Good point. I like the way this works as a hedge for Canadian investors though. ie now positive earnings but negative exchange, future maybe negative earnings comparisons but positive exchange.

Dividend Growth Investor said...

I think that the foreign exposure evens out in the long term ( 2-3 decades from now). I was reading through Dogs of the Dow ,issued in the early 1990's, where the author analyzed all Dow stocks. It was interesting that he looked at the foreign exposure of Dow stocks as a negative at the time.

Middle Class Millionaire said...

DGV,

I agree. Over the very long term everything should revert back to it's mean. However, the built in hedge helps to smooth out the curve. As the economy strengthens in the U.S and the dollar appreciates it will deflate JNJ's international revenue but...66% of their revenus is still from the U.S so presumably they will also be benefitting from the strengthening U.S economy.

Moneymonk said...

JNJ is a global company with good mgmt and low debt. i'm trying to wait until it get a little cheaper to buy in

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