MarketView for October 13

Summary

The Street’s momentum fell by the wayside on Tuesday, ending the S&P 500's six-day winning streak as disappointing sales from Johnson & Johnson once again had the Street worrying about the strength of corporate earnings as we move into the last quarter of the year. With the last two earnings periods characterized by cost cutting, it had been hoped that companies would begin to show revenue growth in third-quarter results, along with improved outlooks for the fourth quarter.

Although Johnson & Johnson exceeded Street's earnings expectations, the company also reported that revenue came in below forecasts, sending its shares down 2.4 percent to $61.01. At the same time, the after-hours results from Intel could bode well for Wednesday's session after the company reported earnings and revenue numbers that exceeded expectations. Intel also forecast revenue for the current quarter that was ahead of Wall Street's targets. As a result, stock index futures were higher, while Intel rose 5.2 percent to $21.56 in after-hours trading.

Financial shares came under pressure on Tuesday, with several major banks reporting results this week. Goldman Sachs fell 1.5 percent to $187.23 after one banking analyst downgraded the shares, writing to clients that the upside could be limited for the company in the medium term.

The Nasdaq managed to keep its head above water after Cisco Systems agreed to buy Starent Networks for $2.9 billion, or $35 per share. Cisco's shares added 0.5 percent to close at $23.89, while Starent, which makes telecommunications equipment, rose 16.8 percent to close at $33.91.

Healthcare stocks slid during the session after a key Senate committee endorsed a sweeping healthcare overhaul as it gained the support of an influential Republican. The proposal will be merged with the Senate health panel's version and moved to the full Senate for debate in the next few weeks.

Crude hits 7-week High

The price of crude oil hit a seven-week high on Tuesday after OPEC raised its 2010 demand forecast and the dollar weakened, boosting demand for commodities. OPEC said a recovering world economy is expected to boost world crude demand by 700,000 barrels per day next year, to almost 85 million barrels a day.

Last month, OPEC forecast a 500,000 barrel-per-day increase in global demand for next year. The Energy Information Administration and the Paris-based International Energy Agency also raised their 2010 demand forecasts last week.

"The world economy now appears to be entering into a new phase, moving from a period of containing the crisis to one of economic recovery," OPEC said in its report.

Sweet domestic crude for November delivery settled up 88 cents per barrel at $74.15. London Brent crude settled up $1.04 per barrel at $72.40. The price of crude oil is up 65 percent so far this year, but has failed to break a 2009 high of $75 a barrel as investors remained wary of the pace of a U.S. economic rebound.

Cold weather also helped add support to oil prices. The National Weather Service forecast the first seasonal wave of cold weather in the Northeast and Midwest would boost demand for heating oil to 43 percent above normal levels.

Weekly oil inventory data from the American Petroleum Institute will be delayed until Wednesday due to Monday's Columbus Day holiday, while the Energy Information Administration report will be released on Thursday.

Profit Up but Sales Fall Short

Johnson & Johnson posted weaker-than-expected quarterly revenue of $15.08 billion, down 5 percent from a year ago, as sales of prescription drugs and cardiac stents came in below expectations, reporting total sales.  Earnings for the quarter were up a meager 1.1 percent, as generic competition reduced sales of several of the company’s top drugs and the recession hurt consumer product sales.  Anemia medicine Procrit, arthritis treatment Remicade and attention deficit disorder drug Concerta all fell short of analyst targets for the quarter.

J&J reported net earnings of $3.35 billion, or $1.20 per share, up from $3.31 billion, or $1.17 per share, a year earlier. Unexpectedly lower taxes in the quarter help to raise results by 5 cents per share, according to J&J Chief Financial Officer Dominic Caruso. He said the lower taxes would continue in the fourth quarter and improve full-year results by 7 cents per share – offsetting the negative impact on earnings of recent acquisitions.

Pharmaceutical sales, which had been the top-selling division, suffered a 14.1 percent drop in sales, to $5.25 billion from $6.1 billion, as U.S. sales fell 19 percent. J&J cited a $680 million decrease in the combined sales of two blockbusters with recent generic competition: epilepsy drug Topamax, which had a 76 percent drop in sales, and the short-acting version of antipsychotic drug Risperdal, which was down 40 percent.

J&J's Procrit and Eprex anemia drugs continued to suffer because of safety concerns for the category, with combined sales falling 12 percent to $542 million. Safety concerns also hurt Concerta, whose sales dropped 29 percent to $284 million. Sales of arthritis drug Remicade rose almost 6 percent to $1.04 billion despite the weak global economy, which has hurt sales of costly rival treatments. Even so, Remicade growth was far from the 24 percent seen in the second quarter.

Medical device sales rose 2.3 percent to $5.8 billion. Cypher stent, used to prop open heart arteries that have been cleared of plaque, continued to suffer big sales declines in the United States and overseas due to competition from similar products.

Sales of J&J's array of consumer products fell 2.7 percent to $3.99 billion, hurt by the stronger dollar, although the segment was less of a drag than in the second quarter.

Among the key deals in the last quarter, J&J jumped into the vaccine business by paying $440 million for a stake in Dutch biotechnology company Crucell NV, which is developing an antibody-based vaccine and a drug that would target all types of influenza. J&J also invested nearly $1.4 billion in Irish biotech company Elan Corp., which it will help to develop two experimental drugs for Alzheimer's disease and a vaccine to prevent it.

For the first nine months of the year, net income fell 2 percent to $10.06 billion, or $3.61 per share, from $10.24 billion, or $3.60 per share, in the same period in 2008. Revenue fell nearly 7 percent to $45.35 billion from $48.57 billion.

J&J has a long reputation of meeting profit forecasts even in tough times because of its ability to wring cost savings from its hundreds of subsidiaries. J&J forecast 2009 earnings of $4.54 to $4.59 per share, excluding items. It previously projected $4.45 to $4.55.