Johnson & Johnson is suitable for the Enterprising Investor, but not the more conservative Defensive Investor, who is concerned with the insufficient earnings growth over the last ten years, as well as the high PEmg and PB ratios. The Enterprising Investor, on the other hand, has no initial concerns. As a result, the Enterprising Investor should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $4.41 in 2010 to only an estimated $4.74 for 2014. This demonstrated growth does not support the market’s implied estimate of 6.6%. In fact, historically demonstrated growth has been only 1.47% per year. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the market price at this time, and the company appears to be overvalued by the market.
Disclaimer: The author did not hold a position in Johnson & Johnson (JNJ) at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.