A company may have a big brand name, a long history, and a solid dividend but remain unsuitable for Intelligent Investors. Benjamin Graham taught investors to analyze the company’s financial statements to determine an intrinsic value for the company, then compare the price to the value. 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 investment opportunity. 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 specific look at how Johnson and Johnson Company 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 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 Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$61.79|
|Value Based on 0% Growth||$36.22|
|Market Implied Growth Rate||6.44%|
Balance Sheet – 12/29/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Johnson and Johnson is a perennial favorite among many investors because of its solid operating history and relative stability; however, it is not suitable for Defensive Investors because of the lack of sufficient earnings growth over the ten year historical period and the high PEmg and PB ratios. It does pass the tests for the Enterprising Investor, so it remains suitable for that investor type. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods, should feel comfortable proceeding with further research including a review of 5 Undervalued Companies for the Enterprising Investor. As for a valuation, the company has grown its EPSmg (normalized earnings) only from $4.14 in 2009 to $4.26 for 2013. This level of growth is insufficient to support the market’s implied estimate for earnings growth of 6.44%; a more appropriate estimate may be in the 1-2% range. The ModernGraham valuation model returns an estimate of intrinsic value that is below the market price, and the company appears to be overvalued presently.
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 and Johnson Company (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.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in Johnson and Johnson Company (JNJ) at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.