ModernGraham Valuation: Johnson & Johnson (JNJ)

money

Company Profile (obtained from Google Finance): Johnson & Johnson is a holding company. The Company is engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The business of Johnson & Johnson is conducted by more than 275 operating companies located in 60 countries, including the United States, which sell products in virtually all countries throughout the world. In March 2013, Johnson & Johnson’s Cordis Corporation announced the acquisition Of Flexible Stenting Solutions, Inc. In June 2013, Johnson & Johnson announced the opening of the Johnson & Johnson Innovation center in Boston. In August 2013, Johnson & Johnson announced it has completed its acquisition of Aragon Pharmaceuticals, Inc., a pharmaceutical discovery and development company focused on drugs to treat hormonally driven cancers.

 

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

 

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation of the ModernGraham valuation model):

MG Value $38.67
MG Opinion Overvalued
Value Based on 3% Growth $61.23
Value Based on 0% Growth $35.89
Market Implied Growth Rate 6.83%
NCAV -$1.76
PEmg 22.15
Current Ratio 2.02
PB Ratio 3.78

Key Data:

Balance Sheet – 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets $52,176,000,000
Current Liabilities $25,835,000,000
Total Debt $9,748,000,000
Total Assets $126,933,000,000
Intangible Assets $51,319,000,000
Total Liabilities $57,129,000,000
Outstanding Shares 2,820,660,000

Earnings Per Share – Diluted

2013 (estimate) $4.79
2012 $3.74
2011 $3.49
2010 $4.78
2009 $4.40
2008 $4.57
2007 $3.63
2006 $3.73
2005 $3.35
2004 $2.74
2003 $2.40
2002 $2.16

Earnings Per Share – Modern Graham

2013 (estimate) $4.22
2012 $4.02
2011 $4.17
2010 $4.41
2009 $4.13
2008 $3.87

Conclusion:

Johnson & Johnson is a strong company from a financial standpoint, with a healthy current ratio, relatively low debt, and a good dividend record.  However, the company’s PEmg and PB ratios are too high for the Defensive Investor.  The company may be suitable for an Enterprising Investor, and those investors that are able to take more time to do further research should do so.  From a valuation standpoint, the company appears to currently be overvalued, as the earnings growth has not been substantial enough to justify the current price.

What do you think?  Is Johnson & Johnson overvalued or does Mr. Market have it right?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Johnson & Johnson at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

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