Pharmaceuticals Stocks

Johnson & Johnson Valuation – January 2016 Update $JNJ

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Johnson & Johnson (JNJ) fares in the ModernGraham valuation model.

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 range of products in the health care field. The Company has more than 265 operating companies conducting business around the world. The Company’s primary focus is products related to human health and well-being. The Company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices. The Company’s subsidiaries operate 134 manufacturing facilities occupying approximately 21.5 million square feet of floor space. The Company’s research facilities are located in the United States, Belgium, Brazil, Canada, China, France, Germany, India, Israel, Japan, the Netherlands, Singapore, Switzerland and the United Kingdom.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of JNJ – January 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $272,482,042,311 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.51 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 36.13% Pass
6. Moderate PEmg Ratio PEmg < 20 19.10 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.85 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.51 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.37 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

JNJ value Chart January 2016

EPSmg $5.14
MG Growth Estimate 3.49%
MG Value $79.55
Opinion Overvalued
MG Value based on 3% Growth $74.52
MG Value based on 0% Growth $43.68
Market Implied Growth Rate 5.30%
Current Price $98.16
% of Intrinsic Value 123.39%

Johnson & Johnson qualifies for both the Enterprising Investor and the more conservative Defensive Investor.  The Defensive Investor is only initially concerned with the high PB ratio.  The Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $4.17 in 2011 to an estimated $5.14 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 5.3% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Johnson & Johnson (JNJ)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

JNJ Charts January 2016

Net Current Asset Value (NCAV) $0.63
Graham Number $57.74
PEmg 19.10
Current Ratio 2.51
PB Ratio 3.85
Dividend Yield 2.95%
Number of Consecutive Years of Dividend Growth 20

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep15
Total Current Assets $63,494,000,000
Total Current Liabilities $25,260,000,000
Long-Term Debt $14,073,000,000
Total Assets $133,266,000,000
Intangible Assets $47,267,000,000
Total Liabilities $61,712,000,000
Shares Outstanding (Diluted Average) 2,807,200,000

Earnings Per Share History

Next Fiscal Year Estimate $5.73
Dec14 $5.70
Dec13 $4.81
Dec12 $3.86
Dec11 $3.49
Dec10 $4.78
Dec09 $4.40
Dec08 $4.57
Dec07 $3.63
Dec06 $3.73
Dec05 $3.35
Dec04 $2.74
Dec03 $2.29
Dec02 $2.16
Dec01 $1.84
Dec00 $1.61
Dec99 $1.39
Dec98 $1.06
Dec97 $1.21
Dec96 $1.09

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.14
Dec14 $4.74
Dec13 $4.26
Dec12 $4.06
Dec11 $4.17
Dec10 $4.41
Dec09 $4.13
Dec08 $3.87
Dec07 $3.39
Dec06 $3.13
Dec05 $2.72
Dec04 $2.31
Dec03 $2.01
Dec02 $1.79
Dec01 $1.54
Dec00 $1.35
Dec99 $1.13

Recommended Reading:

Other ModernGraham posts about the company

Johnson & Johnson Analysis – September 2015 Update $JNJ
Johnson & Johnson Analysis – June 2015 Quarterly Update $JNJ
28 Companies in the Spotlight This Week – 2/28/15
Johnson and Johnson Company Quarterly Valuation – February 2015 $JNJ
22 Companies in the Spotlight This Week – 11/29/14

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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