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Johnson & Johnson Must Remedy Weak Organic Growth

NEW YORK ( TheStreet) -- I didn't win many friends after suggesting in early August that shares of Johnson & Johnson (JNJ - Get Report), which were trading at around $94, were too expensive.

Not only had the health care giant (then) posted year-to-date gains of 30%, but the stock carried a price-to-earnings ratio that was (then) six points higher than rivals Abbott labs (ABT) and Pfizer (PFE), which didn't make sense to me.

Aside from the valuation concerns, there were also some red flags in Johnson & Johnson's operational performance. While the company's overall revenue results appeared solid, led by strong performances in the drug business, there were some noticeable weaknesses in its other segments. Yielding just 2% revenue growth in its consumer business was one example (in constant currency).

Since that article, shares of Johnson & Johnson have been down by as much as 9%. With the company due to report its third-quarter results Tuesday, I believe management needs to show not only better diversification but also meaningful improvements in organic growth, which spans beyond the Synthes acquisition.

Tuesday, The Street will be looking for Johnson & Johnson to post a profit of $1.32 per share on revenue of $17.43 million. Earnings are expected to grow almost 6% year over year, while revenue is expected to grow at a paltry 2%.

I say "paltry" because this would be less than half of the 5% growth the company posted in the July quarter -- not to mention the estimated 2% growth would be a quarter of the 8% growth the company posted in both the April and January quarters.

Clearly, the direction of the revenue trend is still a concern. However, the real question is to what extent does this impact the company's organic growth.

Johnson & Johnson bulls often disagree whenever the "organic" argument is raised. Organic growth measures a company's operational performance, while removing external factors such as acquisitions. Take, for instance, the devices business: While that segment did register a healthy 12% year-over-year revenue growth in the July quarter, on an organic basis, growth was actually less than 2% when adjusting out the contribution from Synthes.

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