Equities Update: Johnson & Johnson, Just Eat, Whitbread, LVMH…

Johnson & Johnson reports strong sales, but acquisition costs cast a shadow

Adam Vettese, market analyst at investment platform eToro, says: “Medtech and pharma multinational Johnson & Johnson managed to top estimates for both its top and bottom line for its third-quarter, with oncology drugs and its med-tech segment performing strongly.”

“Overall sales were healthy, outperforming the same quarter last year by more than 5%, but net earnings were significantly lower thanks to a one-time charge relating to M&A activity. A significant part of this is related to its acquisition of medical device company V-Wave earlier this month, which provides solutions to aid treatment of cardiovascular disease. The deal resulted in an in-process and development charge in the region of $600m, and the transaction is expected to impact earnings into 2025.

“There is good news for the company’s drug pipeline, with the FDA giving regulatory approval last month for inflammatory bowel treatment Tremfya and lung cancer drug Rybrevant, though the updated full year guidance is something of a double-edged sword. Excluding-M&A impacts, the company sees higher earnings from an ‘improved performance outlook’, but once M&A charges are factored in, the adjusted operational EPS forecast is significantly lower than previous guidance. The market reacted negatively to the results, with shares sliding more than 1% in pre-market trading on Wall Street.”

Premier Inn owner Whitbread further consolidates their position in the UK and Germany

Mark Crouch, market analyst at investment platform eToro, says: “There is no doubt just how much the pandemic hurt Whitbread. As COVID-19 tore through the hospitality sector, hotels and hospitality outlets were forced to adapt in a bid to survive. However, as is often the case in times of crisis, there comes opportunity.

“Following the pandemic, Whitbread’s competition has significantly thinned out, allowing the Premier Inn owner to consolidate its position as the UK’s leading hotel chain and further bolster its standing in Germany, where total accommodation sales grew by 22% in the first half of the year. The last year has seen a significant downturn in hotel construction in the UK with new investors unwilling to take the risk while the pandemic is still fresh in the memory.

“This has left a much clearer path for Whitbread, who during the period have implemented successful cost saving initiatives, selling up poorly performing Beefeater and Brewers Fayre restaurants or indeed opting to make better use of that space by converting them into more Premier Inn rooms, seizing the opportunity to occupy the gap in the market.”

“And the numbers being reported by the company suggest all the hard work is paying off. Shareholders are set for a windfall of returns in the form of dividends and buybacks after what has been an extremely challenging period, things at Whitbread look much cosier.”

Two Main Questions For LVMH

 
Mark Nelson, Senior Equity Analyst at Killik & Co said:
 
The results were disappointing and a reflection of the challenging backdrop against which luxury goods companies are currently operating. The all-important Fashion & Leather Goods division saw sales decline by 5% on an organic basis, due to ongoing weakness in China, while the strength seen in Japan persisted but at a slower pace than in the first half. Elsewhere, Wines & Spirits remain weak as do Watches & Jewelry. Perfumes & Cosmetics and Selective Retailing organic sales growth was positive, but still below consensus estimates. In the post-release call, management continue to express their confidence in the long-term growth prospects of the luxury goods industry while conceding that they have limited ability to predict when the short-term outlook will improve. The company is focusing on innovating its product to maintain its desirability, whilst looking to manage costs carefully in the face of weaker demand.

We continue to view LVMH as a very high-quality business, with strong brands, meaningful competitive advantages, and a strong management team, however, shares have struggled over the last twelve months as the pandemic era surge in demand for luxury goods has faded particularly in China where economic conditions have weakened.
 
Going forward, there appear two main questions to answer on the LVMH investment case. The first is whether the weakness in China is merely cyclical or a sign of a structural change? The second is, if this a cyclical downturn, when does it bottom? On the first, we continue to believe in the growth of the middle class in emerging markets including China. We do not expect the country’s common prosperity drive to necessarily be a headwind to luxury goods businesses, as aspirational consumers just entering the middle classes are as important a customer for the industry as the ultra-high net worth consumer is. 2023 saw 18% organic growth from the Asia (excl. Japan) cluster, providing us with recent evidence of the presence of strong luxury goods demand under the right economic conditions. On the second, we share LVMH’s management team’s limited confidence in being able to call short-term gyrations in the global economy, but, we would note that interest rates are falling in developed markets which should be ease pressure on consumers in those regions. Whilst in China, consumer confidence is close to record lows, and the government has recently announced a series of stimulus measures, showing clear intent that it will do what it can to support its economy. LVMH shares trade on a price to December 2025 earnings ratio of 19.7x and offer a prospective dividend yield of 2.4%. (Buy)