Interactive Investor

Two standout shares I’d snap up

Overseas investing expert Rodney Hobson examines two different companies that not only beat second-quarter earning expectations, but offer a rosy picture over the rest of 2023.

9th August 2023 10:28

by Rodney Hobson from interactive investor

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Among the welter of companies reporting second-quarter figures, two quite different ones stood out for not only beating expectations but also for offering a rosy picture over the rest of the year. Neither companies’ shares have fully reflected the better prospects.

One of the most upbeat results statements in the latest round of figures from American companies came from pharmaceuticals and consumer goods giant Johnson & Johnson (NYSE:JNJ).

Second-quarter sales rose 6.3% to $25.5 billion, while net earnings were up 6.9% at $5.14 billion, both figures well up to or slightly better than analysts’ expectations. The performance was good enough to prompt the company to edge up its full-year guidance for sales, and also for earnings per share to reach at least $10.70. The quarterly dividend has been increased from $1.13 to $1.19.

J&J is focusing on two strands: pharmaceuticals and medical technology, no bad thing given that it has been juggling a somewhat disparate range of products. The latest move is to split off at least 80% of Kenvue, its former consumer goods arm, in which J&J still holds 90%.

The medical devices side was badly affected by the pandemic but is bouncing back and will benefit from the concentration of attention.

Johnson & Johnson chart Rodney Hobson Aug 2023

Source: interactive investor. Past performance is not a guide to future performance.

However, life is never easy for health-related companies. On the plus side, there is strong demand for cancer treatments and newer cancer drugs should add a further boost, although one can never be sure that new drugs will live up to early promise. The blockbuster arthritis treatment Stelara has patent protection for now but cheaper rivals could be on the horizon in a couple of years’ time.

Then there is the massive litigation over J&J’s baby talcum powder, with nearly 40,000 lawsuits alleging the product caused cancer. J&J strenuously denies this but litigation in the United States is expensive and uncertain and the company has already set aside $8.9 billion to make the problem go away. With still no guarantee that it will do.

J&J shares shot up from $159 to $174 on the results but have since slipped back a little. The price/earnings ratio is challenging at 34, while the yield is a respectable 2.65%. 

Fast food chain McDonald's Corp (NYSE:MCD) also beat profit expectations as it attracted more customers despite raising prices to offset inflation. Net income nearly doubled to $2.3 billion in the second quarter with total revenue up a less impressive but still respectable 14% to $6.5 billion.

McDonald's chart Rodney Hobson August 2023

Source: interactive investor. Past performance is not a guide to future performance.

Sales rose strongly across the world, with Germany and the UK narrowly topping the leaderboard. With inflationary pressures easing on ingredients and labour costs, the rise in revenue will tail off over the rest of the year but so will the squeeze on profits. In fact, as McDonald’s will no longer be forced to ramp up prices, it could well attract even more diners. In any case, costs are already falling, down 15% in the second quarter. The chain may be able to reduce prices in the current three months.

The stock market anticipated the better prospects with a strong rise in the share price from $260 in March to nearly $300 in May but the latest figures have produced only a muted response. At around $290 the p/e is 27 and the yield is just over 2%.

Hobson’s choice: I have recommended J&J shares several times, arguing that there is a floor at $160 and that they should regain their previous peak of $180. That stance is still in place.

The healthier eating campaign is clearly having little or no effect on McDonald’s. In any case, investors are more interested in whether the shares, not the meals, are tasty. I rated the shares a buy in May but took the precaution of suggesting that investors could wait for the price to slip back, which has now happened. Buy.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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