Zacks Analyst Blog Highlights: Johnson & Johnson, D.R. Horton, International Paper, Berkshire Hathaway and Masco

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Jan 26, 2011, 09:30 ET

CHICAGO, Jan. 26, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: Johnson & Johnson (NYSE: JNJ), D.R. Horton (NYSE: DHI), International Paper (NYSE: IP), Berkshire Hathaway (NYSE: BRK.B) and Masco (NYSE: MAS).

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Here are highlights from Tuesday's Analyst Blog:

J&J Disappoints, Outlook Weak

Johnson & Johnson's (NYSE: JNJ) fourth-quarter 2010 earnings (excluding special items) of $1.03 per share was in-line with the Zacks Consensus Estimate and a penny above the year-ago earnings of $1.02. Full year earnings came in at $4.76 per share, a penny above the Zacks Consensus Estimate and 2.8% above the year-ago earnings.

The company's revenues for the reported quarter decreased 5.5% year-over-year to $15.6 billion. Revenues fell short of the Zacks Consensus Estimate of $15.9 billion. While operational factors negatively impacted sales by 5.1%, foreign exchange movement negatively impacted sales by 0.4%. Full year revenues, which fell short of the Zacks Consensus Estimate of $61.9 billion, declined 0.5% to $61.6 billion.

The top-line was impacted by the series of over-the-counter (OTC) product recalls announced by Johnson & Johnson during 2010.

The Quarter in Detail

Fourth quarter sales declined both in the domestic as well as the international market. While domestic sales declined 8.1%, international sales declined 3.1%.

The Medical Devices & Diagnostics segment was the only segment to record minimal growth during the fourth quarter. Sales increased 0.2% to $6.3 billion. Both operational factors and foreign exchange movement positively impacted Medical Devices & Diagnostics segment sales by 0.1% each. While sales in the domestic market increased 1.6% to $2.9 billion, international market sales declined 0.8% to $3.5 billion.

Primary contributors to growth included Vision Care, Ortho-clinical diagnostics, Ethicon's surgical care products, and Ethicon Endo-Surgery's minimally invasive and advanced sterilization products. The Cordis franchise continued to record a decline in sales with performance being impacted by competitive pressures in the drug-eluting stent market.

The Consumer segment recorded revenues of $3.6 billion in the reported quarter, down 15.0% from the fourth quarter of 2009. Operational factors and foreign exchange movement reduced sales in the segment by 14.5% and 0.5%, respectively. Sales in the domestic market declined 28.8% year-over-year to $1.2 billion, whereas the international market recorded a 5.8% year-over-year decline to $2.4 billion.

The series of OTC product recalls, the suspension of manufacturing at Fort Washington facility and the currency devaluation in Venezuela hampered revenues in the segment.

Pharmaceutical segment sales declined 4.7% year-over-year to $5.7 billion. Sales in the domestic market declined 5.7% to $3.1 billion whereas the international market fell 3.5% to $2.6 billion.

Growth of drugs like Prezista, Invega and Velcade was offset by a decline in sales of Aciphex, Concerta, Duragesic/Fentanyl Transdermal, Levaquin/Floxin, Procrit/Eprex, Topamax, Remicade and Risperdal/Consta among others. Topamax continued to be impacted by generic competition.

Earnings Guidance Disappoints

Johnson & Johnson's 2011 earnings guidance was well below expectations at $4.80 to $4.90 per share. This is significantly below the current Zacks Consensus Estimate of $4.98.

Home Prices Falling Again

The tax credit was not a very effective means of stimulus, but it did help prop up prices, and that is a pretty important accomplishment, even if it proves to be ephemeral. The credit cost the government about $30 billion. A large part of that money went to people who would have bought anyway, but perhaps would have done so in July or August rather than May or June. To the extent it rewarded people for doing what they already would have done, it did nothing to stimulate the economy.

Also, turnover of existing houses really does not do a lot to improve the economy. It is the building of new houses that generates economic activity. It is not just about the profits of D.R. Horton (NYSE: DHI). A used house being sold does not generate more sales of lumber by International Paper (NYSE: IP) or any of the building products produced by Berkshire Hathaway (NYSE: BRK.B) or Masco (NYSE: MAS). It does not put carpenters and roofers to work. New homes do. While housing prices are important to the economy, the level of turnover in used houses is not.

Housing Wealth

Home equity is -- or at least was -- the most important store of wealth for the vast majority of families. Houses are generally a very leveraged asset -- much more so than stocks. Using your full margin in the stock market still means you are putting 50% down. In housing, putting 20% down is considered conservative, and during the bubble was considered hopelessly old fashioned.

As a result, as housing prices declined, wealth declined by a lot more. For the most part we are not talking vast fortunes here, but rather the sort of wealth that was going to finance the kids' college educations and a comfortable retirement. With that wealth gone, people have to put away more of their income to rebuild their savings if they still want to be able to send the kids to college or to retire.

The decline in housing wealth is a very big reason why retail sales have been so weak. With everyone trying to save, aggregate demand from the private sector is way down. If customers are not going to spend and buy products, employers have no reason to invest to expand capacity. They have no reason to hire more workers.

Millions Underwater

Also as housing prices fell, millions of homeowners found themselves owing more on their houses than the houses were worth. That greatly increases the risk of foreclosure. If the house is worth more than the mortgage, the rate of foreclosure should be zero. Regardless of how bad your cash flow situation is -- due to job loss, divorce or health problems -- you would always be better off selling the house and getting something, even if it is less than you paid for the house, then letting the bank take it and get nothing.

By propping up the price of houses, the tax credit did help slow the increase in the rate of foreclosures. Still, 23% of all houses with mortgages are worth less than the value of the mortgage today. Another five percent or so are worth less than five percent more than the value of the mortgage. If prices continue to fall, those folks well be pushed underwater as well.

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