Johnson & Johnson Must Remedy Weak Organic Growth

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NEW YORK (TheStreet) -- I didn't win many friends after suggesting in early August that shares of Johnson & Johnson , 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 and Pfizer , 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.