Commentary

Company of the Week – Johnson & Johnson (JNJ)

The company of the week this week is Johnson & Johnson (JNJ), a manufacturer of a range of products in the healthcare field.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     Though over the years the products and research methods of the company have become more sophisticated as technology has improved, the overall business plan has stayed the same.  The company is in the business of providing products that help improve the quality of life from a health and personal care standpoint.  The company is well diversified across the healthcare industry, but has remained focused on segments related to its overall business plan.

2.  Does the business have a consistent operating history?

     Johnson & Johnson was founded in 1886 and has been a driving force in developing state of the art healthcare solutions ever since.  Dividends have been paid to shareholders every year since 1944, and have increased each year for 44 straight years.  Sales have increased each year for 73 years, and the company has experienced double-digit earnings increases for 21 consecutive years. 

3.  Does the business have favorable long-term prospects?

     The company’s customers will always have a need for healthcare products.  This persistent need is evident in the company’s low beta of about 0.21.  The real question is whether or not the company can continue to grow consistently into the long-term future.  We believe it can.  In the developed world, the average lifespan is increasing as well as the number of elderly overall.  In the developing world, the need for healthcare products will increase as cultures become more open to using the products and economic situations improve for consumers to afford the products.  These two factors combined lead to favorable long-term prospects for Johnson & Johnson and the rest of the pharmaceuticals and healthcare industry.

4.  Is management rational?

     In the latest annual report, management addresses the fact that they had informed shareholders in the previous annual report of their intent to purchase Guidant Corporation.  However, over the year events changed leading to the acquisition price of Guidant to increase significantly.  After the increase, management was remained rational and focused on the needs of shareholders and determined that a purchase was no longer in the interests of their shareholders.  This is very rational behavior among management that is all too often missed in many managers today.  Frequently, managers will become determined that a particular action is best for shareholders, and refuse to reexamine the action as time goes by and the situation changes.  Johnson & Johnson’s management clearly was rational in this situation and can be expected to remain rational in the future.

5.  Is management candid with its shareholders?

     Johnson & Johnson has an extensive investor relations page on their website, which can be found at:  http://www.investor.jnj.com/  We feel that William Weldon, Chairman and CEO, also provides a rather in depth and candid letter to shareholders in the company’s annual reports that is worth mentioning.

6.  Does management resist the institutional imperative?

    The company has a history of being a leader in their industry, and often is the first to develop a new product or approach to healthcare for their customers.  It seems that instead of following the institutional imperative and replicating the performance and processes of other managers, the management at Johnson & Johnson has historically been extremely innovative.
 

Financial and Value Review

Upon our review, we find Johnson & Johnson to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, but not suitable for the defensive investor.  The company is currently trading at a PE ratio of 23.09 and price to book ratio of 6.29 – other than these two factors, all aspects of the company’s financial situation and our valuation look good.

We believe the company has potential to reach $81/share in the next few years. 

Neither of us held a position in Johnson & Johnson at the time of publication.  Also, please read our disclaimer and Our Methods.

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