Morgan Stanley Maintains on Johnson & Johnson as 2014 Looks Promising

In a report published Wednesday, Morgan Stanley analyst David Lewis maintained Equal-weight on Johnson & Johnson (NYSE: JNJ), with a NA price target, as 2014 looks promising.

According to the report, performance in 2014 is dependent on continued pharma strength and leverage. The analysts are currently above consensus on pharma and continue to see 100 bps of margin expansion in 2014 despite 4Q concerns. Upside to their $100.00 base case is more dependent on EPS upside than multiple expansion.

“Margin pressure in 4Q13 raised concerns around sustainable leverage, but mix and cost dynamics should keep profitability on track,” the report noted. “Operating margins in the quarter missed consensus estimates by nearly 200 bps, due partly to royalty costs and a planned increase in spending in response to tax upside. However, we still expect about 100 bps of operating margin expansion in 2014, despite 60 bps of GM pressure from yen weakness. Pharma mix alone could be worth 50+ bps to margins, JNJ will likely exercise a buyback to offset OCD spin dilution and J&J's ongoing $1 billion cost reduction program could help insulate operating leverage in future periods.”

Some highlights from the report included:

-JNJ's initial sales outlook was in line with our expectations -Strategic priorities remain largely unchanged

JNJ closed Tuesday at $94.03.