Johnson & Johnson Quarterly Valuation – August 2014 $JNJ

500px-JohnsonandJohnsonLogo.svgBenjamin 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 5 Undervalued Companies for the Enterprising Investor.  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 & 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 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 July 2014, Johnson & Johnson completed the divestiture of Ortho-Clinical Diagnostics business to Carlyle Group.
JNJ Chart

JNJ data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  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 - PASS
  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

Key Data:

Recent Price $103.10
MG Value $51.62
MG Opinion Overvalued
Value Based on 3% Growth $69.00
Value Based on 0% Growth $40.45
Market Implied Growth Rate 6.58%
NCAV $1.05
PEmg 21.67
Current Ratio 2.47
PB Ratio 3.73

Balance Sheet – 6/30/2014

Current Assets $60,119,000,000
Current Liabilities $24,359,000,000
Total Debt $13,303,000,000
Total Assets $135,200,000,000
Intangible Assets $49,111,000,000
Total Liabilities $57,152,000,000
Outstanding Shares 2,822,580,000

Earnings Per Share

2014 (estimate) $5.76
2013 $4.81
2012 $3.86
2011 $3.49
2010 $4.78
2009 $4.40
2008 $4.57
2007 $3.63
2006 $3.73
2005 $3.46
2004 $2.84

Earnings Per Share – ModernGraham

2014 (estimate) $4.76
2013 $4.26
2012 $4.06
2011 $4.17
2010 $4.41
2009 $4.14

Dividend History

JNJ Dividend Chart

JNJ Dividend data by YCharts


Johnson & Johnson is suitable for Enterprising Investors but not for Defensive Investors.  The Defensive Investor is concerned by the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities.  From a valuation standpoint, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $4.41 in 2010 to only an estimated $4.76 for 2014.  This low level of demonstrated growth does not support the market’s implied estimate of 6.58% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out the previous ModernGraham valuations of Johnson & Johnson (JNJ) for more perspective!

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.

Disclaimer:  The author did not hold a position in Johnson & Johnson (JNJ) or in any other company mentioned in this article 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.

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