A Tale of Two

This week there was a plethora of well known Large Cap Stocks that released their 4^th quarter 2010 earnings reports. Some did well and, as always, there were a spattering of those that failed to do well. Consequently, as the Dow nears the 12,000 level, last seen in June 2008, a drill down into two widely held names give us some idea on what's driving the Dow. Looking into both Johnson & Johnson (JNJ) and Caterpillar (CAT), both of who reported this week, we see one who reported stellar results across all its business units (CAT), on the one hand, and one who reported disappointing results across all of it business units (JNJ), on the other.

Essentially, it’s a story about two companies in very different businesses; however, they are linked by their membership in the Dow and their relative stance as core positions in Large Cap Portfolios. From the recent earnings reports of CAT and JNJ let’s take a look at some of the key takeaways:

CAT –  4^th qtr Surges on improved demand worldwide

• Sales topped analysts’ expectations for the quarter and sees overall sales and revenue in 2011 exceeding $50bil vs the $42.6b earned in 2010.
• Company expects earnings of $6/sh for 2011 vs analysts projection of $5.86/share
• Machinery and engine sales rose 69% in the 4^th quarter
• Embarked on aggressive growth strategy to increase its exposure to global infrastructure development and the transportation and mining sectors with its $7.6 billion acquisition of Bucyrus Intl, Inc (BUCY).

JNJ – A Historic Sales-Decline Trend for J&J

• 2^nd consecutive year of declining sales, with 2009 being the first in 76 years.
• Facing broader slowdown in health care spending, partly due to economic sluggishness
• Pharmaceutical unit sales of 5.7 billion, down 4.7%, still being hurt by generic drug competition. Remicade, J&J’s top selling drug, lost share to competitors.
• Consumer unit sales declined 15% with over the counter and nutritionals sales off 31% due largely to the recalls of Tylenol and Motrin.
• Company projected 2011 earnings expectations at $4.80 to $4.90/share, versus street expectations of $4.97/sh on revenue of $64billion.

Both of these companies are well-established businesses that provide an investor with solid dividends, and are well-established franchises. However, the highlights above provide a look into two companies that are headed in different directions. CAT is firing on all cylinders whereas JNJ basically reported falling revenues in each of its business units during the quarter. Whether CAT continues to deliver as they have in the coming 12 months is anybody's guess, and J&J could very well turn things around, but if I’m reading the tea leaves presented in these two reports I think that its clear which business is in a better postion for today’s global economy.