Showing posts with label Johnson and Johnson. Show all posts
Showing posts with label Johnson and Johnson. Show all posts

Tuesday 5 March 2024

Is There An Opportunity With Johnson & Johnson's (NYSE:JNJ) 41% Undervaluation?

Comment:   

An example of using 2 stage growth model and discount cash flow method in valuing a company.

The discount cash flow method is based on 2 assumptions:   future cash flows and the applied discount rate.  

It is not an exact science.  One should you conservative assumptions in your valuation.

Charlie Munger mentioned that he had never seen Warren Buffett using the DCF method in his valuation.   There are better and easier ways to value a company.  Often you will know if a company is cheap or very expensive, even without having to do elaborate studies.   (An analogy is you do not need to know the weight to know that this person is overweight or obese or underweight.)  

Keep your valuation simple.  It is better to be approximately right than to be exactly wrong.

The article below shares how to do valuation in detail.

Happy investing.  




Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Johnson & Johnson fair value estimate is US$275

  • Johnson & Johnson is estimated to be 41% undervalued based on current share price of US$162

  • Analyst price target for JNJ is US$174 which is 37% below our fair value estimate

Does the March share price for Johnson & Johnson (NYSE:JNJ) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Johnson & Johnson

What's The Estimated Valuation?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$22.8b

US$23.9b

US$24.5b

US$25.0b

US$26.4b

US$27.2b

US$28.0b

US$28.7b

US$29.4b

US$30.2b

Growth Rate Estimate Source

Analyst x5

Analyst x6

Analyst x5

Analyst x3

Analyst x3

Est @ 2.99%

Est @ 2.78%

Est @ 2.63%

Est @ 2.53%

Est @ 2.46%

Present Value ($, Millions) Discounted @ 6.0%

US$21.5k

US$21.3k

US$20.6k

US$19.9k

US$19.8k

US$19.2k

US$18.6k

US$18.1k

US$17.5k

US$16.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$193b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.0%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$30b× (1 + 2.3%) ÷ (6.0%– 2.3%) = US$838b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$838b÷ ( 1 + 6.0%)10= US$469b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$663b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$162, the company appears quite good value at a 41% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Johnson & Johnson as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.0%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Johnson & Johnson

Strength

  • Debt is not viewed as a risk.

  • Dividends are covered by earnings and cash flows.

Weakness

  • Earnings declined over the past year.

  • Dividend is low compared to the top 25% of dividend payers in the Pharmaceuticals market.

Opportunity

  • Annual earnings are forecast to grow for the next 3 years.

  • Good value based on P/E ratio and estimated fair value.

Threat

  • Annual earnings are forecast to grow slower than the American market.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Johnson & Johnson, there are three pertinent aspects you should consider:

  1. Risks: Every company has them, and we've spotted 1 warning sign for Johnson & Johnson you should know about.

  2. Future Earnings: How does JNJ's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.



 editorial-team@simplywallst.com (Simply Wall St)

https://uk.finance.yahoo.com/news/opportunity-johnson-johnsons-nyse-jnj-110049724.html

Friday 29 September 2023

JOHNSON & JOHNSON

 































Revenues increased from US 71.3 B in 2013 to US 94.9 B in 2022.

PBT increased from  US15.5 B in 2013 to US 21,7 B in 2022.

EPS increased from US 4,81 in 2013 to US 6.73 in 2022.

PBT margin averages 23.77% from 2013 to 2022.


Quality:  Great (Stalwart, Slow grower)

Management:  Excellent

Valuation: -

Those holding this stock has enjoyed gradual increasing dividends for many years.  An example of a dividend growth investing stock.  















Mkt cap
377.77B
P/E ratio
31.79
Div yield
3.03%
CDP score
A
52-wk high
181.04
52-wk low
150.11

At USD 156.88 per share, it is trading at the lower half of its 52-wk high and low price range, giving a DY of 3.03%.  

My projection is this company will continue to grow its annual EPS at just below 5% per year consistently.

Wednesday 16 December 2015

Johnson & Johnson

Johnson & Johnson
JNJ (NYSE)
Website: www.jnj.com

Sector:  Health Care
Beta Coefficient: 0.5
10 Yr Compound EPS Growth:  8.5%
10 Yr Compound DPS Growth: 11.5%
Dividend raises, past 10 years: 10 times.


Financial Result Year 2014

Revenues (m)     74,311
Net Income (m)   17,105
EPS  5.97
DPS 2.76
Cash flow per share 7.90
Current yield 2.8%

High Price  106.5  P/E 17.8    DY 2.59%
Low Price     96.1  P/E 16.1    DY 2.87%


The company has three reporting segments:
Consumer Health Care ($145 billion in FY2014 sales)
Medical Devices and Diagnostics ($27.5 billion), and 
Pharmaceuticals ($32.3 billion).

J&J has more than 250 operating companies in 60 countries, selling some 50,000 products in more than 175 countries.

The company is fairly active with acquisitions, acquiring small niche players to strengthen its overall product offering.

J&J continues to own a dominant and stable franchise in a secure and lucrative industry.

Persistent and moderate share buybacks and dividend increases gave shareholders their fair share of the profitability of its business.

The company expects to resume a mid-single digits growth pace for both revenues and earnings in FY 2016, with corresponding benefits paid to shareholders.

J&J's steady earnings and cash flow combined with a healthy dividend and share repurchases provide gratifying total shareholder returns.

The P/E has expanded from 14 - 15 to the 16 - 17 range, adding a bit of downside risk.


Stock Performance Chart for Johnson & Johnson





Saturday 7 July 2012

5 Companies You Can Buy Today

By Morgan Housel
July 6, 2012

There are many ways to value a company. Price to earnings. Price to cash flow. Liquidation value. Price per eyeballs on website. Price to a number I made up (this one never gets old). Price to CEO's ego divided by lobbying activity as a percentage of revenue (this one doesn't get used enough).
Which one is best? They're all limited and reliant on assumptions. No single metric holds everything you need to know.
The metric I'm using today is no different. But it's perhaps the most encompassing, and least susceptible to hidden complexities of a company's financial statements. The more I think about it, the more I feel it's one of the most useful metrics out there.
What is it? Enterprise value over unlevered free cash flow.                                                       
  • Enterprise value is market capitalization (share price times shares outstanding) plus total debt and minority interests, minus cash.
  • Unlevered cash flow is free cash flow with interest paid on outstanding debt added back in.
The ratio of these two statistics provides a valuation metric that takes into consideration allproviders of capital -- both stockholders and bondholders.
But you invest in common stock, so why should you care about bondholders? Ask Lehman Brothers investors why. When a company earns money, it has to take care of bondholders before you, the common shareholder, get a dime. Focusing solely on profits and equity can be misleading.
Enterprise value provides a more encompassing view. By bringing debt capital into the situation, we see real earnings in relation to the company's entire capital structure. If you owned the entire business, this is the metric you'd naturally gravitate toward.
Using this metric, here are five companies I found that look attractive.
Company
Enterprise Value/Unlevered FCF
5-Year Average

CAPS Rating (out of 5)
Google (Nasdaq: GOOG  )18.135.2****
Johnson & Johnson(NYSE: JNJ  )19.821.9*****
Procter & Gamble (NYSE:PG  )24.628.4*****
UnitedHealth Group(NYSE: UNH  )6.910.2*****
Colgate-Palmolive (NYSE:CL  )22.824.4*****
Source: S&P Capital IQ.
Let's say a few words about these companies.
Three years ago, Warren Buffett and Charlie Munger had some flattering words for Google. "Google has a huge new moat. In fact I've probably never seen such a wide moat." Munger said. "I don't know how to take it away from them," Buffett said. "Their moat is filled with sharks!" Munger added.
Here's a good example: After trying to make inroads in the online ad business, Microsoft just wrote down almost the entire value of its 2007 purchase of aQuantive. The Daily Beast summed it up well: "Microsoft's $6.2 Billion Writedown Shows It's Losing War With Google."
I still like Microsoft because it's good at what it does. But advertising and search isn't it. That's Google's turf. And today you can buy Google at literally the lowest price-to-cash-flow ratio ever. Take advantage of that while it lasts.
Johnson & Johnson is one of the best-performing stocks over the last several decades. But it's having a rough go of it lately. Recalls, management blunders, more recalls, competition from generics... and on and on. Yes, growth has slowed. Yes, it might stay slow for a while. But valuation more than compensates for that. The stock currently provides a 3.6% dividend yield, and trades for 12 times next year's earnings -- below the market average. It's a good company at a good price.
Procter & Gamble is a similar story. One of the world's greatest collections of brands has hit a slowdown. That's hit shareholder returns -- P&G shares haven't budged in two years. But most of the company's missteps appear to be tied to poor execution by management. My guess: Within a year or two the company will have a new CEO, and the market will come to appreciate its value anew.
Everything important you need to know about UnitedHealth Group comes down to the Affordable Care Act, also known as Obamacare. Most health insurance companies currently trade at depressed valuations, likely because the market hates uncertainty -- something that still exists even after the Supreme Court ruled Obamacare constitutional.
But what are the two most likely outcomes here? One is that Obamacare remains law, in which case insurers will face a raft of costly new rules, but also a flood of new customers essentially mandated to buy their product. The other is that Obamacare is repealed -- likely under a Romney administration -- in which case those costly new rules would go away. Neither outcome seems particularly bad for insurers.
Past performance is no guarantee of future returns, but I can't help but point out how successful Colgate-Palmolive has been over the last 30 years. The toothpaste and soap company has produced average returns of nearly 17% a year since 1980, compared with 11% for the broader market. That's the power of two forces: A strong brand, and simple products that aren't pushed to extinction by new technology. Combine that with a pretty reasonable valuation, and Colgate-Palmolive should be a great company to own for years to come.

Wednesday 28 July 2010

A look at a great dividend growth company JNJ

APRIL 06, 2010


http://ab.typepad.com/ab_analytical_services/2010/04/jnj-dividend-hike-could-be-substantial.html

Saturday 9 May 2009

Turning $37.50 into $900,000.00+ ...

Turning $37.50 into $900,000.00+ ...

Sunday April 26, 2009

According to the most recent Fortune Magazine, which is dedicated to the annual Fortune 500, "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends!

The article goes on to say, "Even if you hadn't reinvested the dividends, that single share would now be 2,500 shares as a result of splits, and you'd be collecting dividends of $4,500 a year from that $37.50 investment. If only Grandpa had bought 100 shares."

Tuesday 5 May 2009

Roundtable: Buffett's Biggest Berkshire Bomb

Roundtable: Buffett's Biggest Berkshire Bomb
By Motley Fool Staff
May 4, 2009 Comments (5)

As you’ll see throughout the week, the Fools were out in force at this weekend’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) conference. How can you resist trekking to Omaha to sit at the feet of Berkshire leaders Warren Buffett and Charlie Munger as they pontificate on the biggest financial crisis (hopefully) of our lifetimes? There were insights galore, but let’s start with these three questions. First, the big one:

What was the biggest bomb Buffett dropped?

Morgan Housel, Motley Fool writer: Forget the biggest bomb from this year's shareholder meeting; I think Buffett dropped the biggest bomb ever this weekend when he said he would have been comfortable putting his entire net worth into Wells Fargo (NYSE: WFC) when it fell below $9 a share in early March. "If I had to put all of my net worth into stock, that would be the stock" he said. I nearly threw up at first, but he made a convincing argument: Well Fargo's cost of capital is the lowest in the industry (and falling), which essentially fosters the birth of a new alpha-bank when the rest of the industry is slowly dying.

Ilan Moscovitz, Motley Fool editor: At a time when nearly everyone is condemning faulty compensation practices that have come to light at major financial institutions like Merrill Lynch and AIG, Buffett went one step further, remarking that compensation procedures are “way worse than practically anyone recognizes.” He said CEOs basically get to pick their own compensation committees, and since no one wants to be paid rationally, you have people being paid to do very irrational things. Boards generally function as a rubber stamp because members know that disturbing the “club-like” atmosphere could endanger their salaries and the prestige their position confers. As a start, he recommended abolishing directors’ salaries, and having compensation plans be drawn up at the board level instead of in committees.

Anand Chokkavelu, Motley Fool editor: I was only a few sips into my strawberry smoothie when Buffett said the words that made me smile the rest of the weekend. Basically, he got better terms on some of his much-maligned equity puts, which I think are great. Check this out: With a strike price, and the relevant put options on the S&P 500 in the 1500s, Berkshire incurred huge mark-to-market losses last year. But his counterparties were forced to “manage risk” by buying expensive credit default swaps on Berkshire Hathaway ... so even when they win, they kinda lose. To mitigate this quirk, they allowed Buffett to lower the strike price to the high 900s (the S&P is currently around 900). All he had to do was lower the term to 10 years from 18 years. Um, thanks for the do-over ... looking forward to the resulting mark-to-market gains.

As Morgan said, Buffett was strong on Wells below $9 a share. If you had to put your whole life savings into one company for the next 10 years, which would it be and why?

Morgan Housel, Motley Fool writer: Johnson & Johnson (NYSE: JNJ) would be near the top of my list. Acquiring absolutely top-tier businesses and leaving management alone to do its thing is the only way you can make a megaconglomerate work, and it's a skill Johnson & Johnson (and Berkshire) have proven spectacularly capable of. Charlie Munger described J&J's culture of decentralized subsidiaries "very Berkshire-like" over the weekend, which really solidified this point. Take the strongest brand names in the world in an industry where the target demographic (aging baby boomers) is exploding and put them all together under one roof, and good things are bound to happen.

Ilan Moscovitz, Motley Fool editor: Aside from Berkshire (the obvious choice), I tend to invest in small caps, so I don’t have many holdings that I would feel comfortable plowing all of my money into. I don’t necessarily like the price right now, but if I had to pick one strong-moated company from among my current holdings that I’d want to have all of my money in, it would probably be Google (Nasdaq: GOOG).

Speaking of bombs, during our press conference with Buffett and Munger yesterday, Munger remarked that “Google has a huge new moat. I’ve probably never seen such a moat.” Buffett explained that some keywords fetch $70 per click and their advertising machine generates its own positive feedback and momentum. To try to parse what he’s talking about, Google has a few positional advantages that feed off one another: a dominant share of the search market, a strong brand, and targeted ad capabilities that produce a network effect between advertisers and end users. Advertisers get a wider market, while end users aren’t pained by sightings for male enhancement products when all they wanted was to buy some flowers for Mother's Day.

Anand Chokkavelu, Motley Fool editor: The fact that we have no idea what the government will do with the banks precludes me from naming a bank. Now Wells Fargo has tons of upside if things go right, and no one knows Wells better than Buffett, but as I watched Buffett sitting at the podium, I couldn’t help but notice the Coke can in front of him. Really, Warren, you’d be more comfortable holding Wells Fargo than one of your other huge holdings, Coca-Cola (NYSE: KO)?

All three of us are shareholders. Is your faith in Berkshire Hathaway higher or lower than it was before the meeting? Why?

Morgan Housel, Motley Fool writer: My faith is unwavered. People like to hint at Berkshire's impending collapse as soon as Buffett and Munger die, but I've always thought this argument is incredibly short-sighted. Berkshire's long-term potential will be more of a product of what Buffett and Munger have spent the last 40 years creating, not solely the product of what they can create in the future -- sort of like Sam Walton's enduring contribution to Wal-Mart (NYSE: WMT). Buffett has almost no input whatsoever on day-to-day operations of Berkshire's 60 subsidiaries, yet some insinuate they'll shrivel and die without him. The potential for future homerun investments will obviously shrink without Buffett at the helm, but that's already assured given Berkshire's size. As Munger said a few years ago, "If you get Warren Buffett for 40 years and the bastard finally dies on you, you don't really have a right to complain."

Ilan Moscovitz, Motley Fool editor: About the same. The meeting reiterated Berkshire’s moats: A sterling reputation that attracts deals, a strong financial position that gives them the ability to act quickly and boldly when opportunities present themselves, and brilliant and capable leaders with independent thought and the right incentives.

Anand Chokkavelu, Motley Fool editor: The equity put reset (see my answer to the first question) reminded me why I finally bought in a few months ago ... people are just throwing money at Buffett these days.


This roundtable article was compiled by Anand Chokkavelu. Anand owns shares of Berkshire Hathaway. Google is a Motley Fool Rule Breakers pick. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. Berkshire Hathaway, Coca-Cola, and Wal-Mart are Motley Fool Inside Value picks. Johnson & Johnson and Coca-Cola are Motley Fool Income Investor recommendations. The Fool owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.

http://www.fool.com/investing/general/2009/05/04/roundtable-buffetts-biggest-berkshire-bomb.aspx