Updated: Feb 20, 2021
Company: Johnson & Johnson
Ticker: JNJ Previous Close: $165.74 (2/18)
Industry: Pharmaceutical/Medical Devices/Consumer Healthcare
Johnson & Johnson (JNJ):
Free Cashflow: $18,310,000,000
Revenue ( = Sales): $82,584,000,000
Free Cashflow / Revenue (>5%) = 22.17% ➤ This is certainly a good ratio. Looking at this from the dividend paying perspective, we can see that this is also quite the logical value. This firm is known for paying consistent dividends and these strong free cashflows support this value metric.
Net Margins (> 15%)
Johnson & Johnson (JNJ):
Net Income (consolidated) : $14,714,000,000 Revenue : $82,584,000,000 Net Margin = Net Income / Revenue = 17.82% ➤ This is a very decent percentage rating and in the past this percentage was similar which is indicative of extreme consistency on behalf of the company.
ROE (> 15%)
Johnson & Johnson (JNJ):
Return On Equity= Net income/ Shareholder's equity ROE = 24.74% ➤ This is a very good percentage which is a result of their strong net income. In past years this was also the case sometimes even being slightly better, again showing the company over the longer terms has been extremely consistent on the fronts of efficiency and growth.
ROA (> 6%)
Johnson & Johnson (JNJ):
Return On Assets= Net Income / Assets ROA = 9.33% ➤ This is a strong percentage and similar to the other fundamental valuation metrics, this percentage was also similar in the past. Again this results from their strong net income and proves the company is consistently growing and a strong asset over the longer terms.
Economic Moat Conclusion
Johnson & Johnson (JNJ): Altogether, this firm has great free cashflows and net margins. Both their ROE and ROA are also very high to which, when accounting for all the aforementioned factors, we can conclude that JNJ indeed has an economic moat and that they have a good foundation through which they will continue being able to pay dividends to shareholders well into the future.
Johnson & Johnson:
For this metric we will use their current free cashflow of $18,310,000,000. It should first be noted that in the past, their cashflow mostly had an upward trend. Based on recent figures, JNJ can be assumed to have an average yearly growth of 9% in the first 5 years and 6% after that. Due to the firm's economic moat and strong dividend, a sizeable discount rate of 7% can be presumed. Taking each of these variables into account and calculating them together, we come to a per-share price of $219.54.
Current Price: $165.74 Estimated Fair Value: Price $219.54 ➤ 24.12% Margin of Safety ➤ This value seems to be right around the sweet spot. Usually for a strong and steady company it is preferred that they have a safety margin of 20%, which is currently the case here. This factor, in sum, leads investors to the conclusion that JNJ is currently well-valued or even slightly under-valued depending on one's outlook.
20 Point In-Depth Analysis
Johnson & Johnson: Alex Gorsky is the CEO and has been since 2012; however, he has been with the company for much longer than that. Interesting to note though is that his career with JNJ has been a bt more unconventional than most. In short, he joined JNJ in 1988, left them in 2004 to join another pharmaceutical company after which he came back to the firm in 2008. This joining and leaving on different occasions is thus two-fold in nature in the sense that he acquired more experience, a valuable trait for a CEO leading a Fortune 500 company, but it also shows that he could leave once more if a better opportunity were to arise. Additionally, Gorsky at the helm of the company has been both criticized and praised over the years. For example, he has been accused of being actively involved in the Risperdal fraud that proved extremely detrimental to the company at one point and time. On the other hand, he has been named one of the “100 Most Inspiring Leaders” by Pharma Voice. All in all, Gorsky seems to be a seasoned leader with more than enough experience to continue pushing the firm forward into the future but again, he is quite the unusual CEO. Whether or not you like his means of conducting business and mode of operation, the firm has stayed successful and consistent throughout the years which, above all else, is most important.
2. Is the company innovative?
Johnson & Johnson: Innovation, both incremental and disruptive, are necessary in the pharmaceutical and consumer healthcare industry. There are still many health problems that plague humanity and to which no solutions or cures have yet been found. In this instance there is strong emphasis on the word “yet” since extensive R&D is constantly being done to resolve these issues. In order to solve these problems and yield current solutions, JNJ tries to innovative by creating new healthcare methods and products to be utilized.They do this by working together with entrepreneurs and innovators across the world in the consumer healthcare and pharmaceutical fields. Via this the creation and sustaining of these valuable partnerships JNJ does, in fact, continue to grow and innovate.
3. Can the company grow?
Johnson & Johnson: There certainly is room for this firm to grow. As explained in the previous point, the healthcare industry has no shortage of problems, ailments, and/or diseases to be resolved and tended to. The good thing about JNJ is that they have enough capital to fund the R&D needed to solve these problems and keep them on the side of cutting-edge development and growth.
4. How does the company grow?
Johnson & Johnson: As has been explained in the previous two points, JNJ has the ability to grow by solving healthcare problems which require innovation. More specifically, the company invests in new healthcare solutions like medicines through their own research programs and partnerships. The resulting factor is that JNJ then drives growth and yields success over the long-term.
5. Is the company market leader?
Johnson & Johnson: Their size, available capital, portfolio of intellectual property and heavy investments in new products ensure JNJ stands alone at the top of their industry. Though this is the case, when this point is further scrutinized it could be difficult to wholly say that they are a real market leader. The previously explained innovation and growth characteristics result in the market being quite competitive, which of course puts pressure on any market leader. We will further look at this in the next point.
6. Is their market leadership safe?
Johnson & Johnson: JNJ is in a very competitive industry where almost anything can change in the blink of an eye. What protects this firm the most is their size, available capital, IP and economic moat which consistently aid in edging out the competition. The main factor that could strain their market leadership are the huge R&D expenditures in combination with the competitive industry. A product that doesn’t work as intended in the later stages of development can be a heavy financial burden setting them back on their production timeline. This detrimental factor could then further exacerbate in the presence of fierce competition. To conclude, JNJ is extremely protected in terms of market leadership but due to the heavy competition and how fast things change within this industry, they must always stay prepared and ready to tackle issues that could threaten their market position.
7. Is there foreign exchange risk or commodities risk?
Johnson & Johnson: Due to their global presence the firm is influenced by foreign exchange risk.
8. How are their profit margins?
Johnson & Johnson: Currently, they have a net margin of 17.82%. This is quite good considering current circumstances, but slightly worse than years prior. This “decline” shouldn't be considered all too bad as this is an occurrence that can happen from time to time.
9. How much capital does the company need?
Johnson & Johnson: Their research and development are very capital intensive and necessary to stay competitive which means that large amounts of capital are needed. Luckily, they do have good cashflow which helps in funding these R&D expenditures posing no problem to future growth or constraining future cashflows.
10. Does the company have a loyal customer base?
Johnson & Johnson: This firm has multitudinous IPs in regard to medicines that are used every day and that are also necessary for the broader populations. To that end, this cannot be considered a ‘loyal’ customer base in the traditional sense but rather a large customer base that depends on their products and medicines to survive. Personally, I think this could be seen as an alternative for a loyal customer base as it works as a sort of lock-in. It should be noted, however, that some medicines are outdated quite fast which means JNJ needs to keep investing in new IP to retain this large customer base.
11. How much cash does the company produce?
Johnson & Johnson: Comparing their free cashflows to their revenue we find a good ratio. Overall, this was also the case in the past which proves to be very good for the firm.
12. What is their value creation over the past ten years?
Johnson & Johnson: The firm has seen a rise in value of around 139.30% over 10 years. This is about average, but this does not include their consistently rising dividends which makes their total growth that much better.
13. Can the company pay its bills?
Johnson & Johnson: They have a quick ratio of 1.24 and a current ratio of 1.48. This is good because it means they can, in fact, pay back their short term debt with a reasonable level of comfortability without constraining daily business operations.
14. How does the company finance itself?
Johnson & Johnson: They have sufficient free cashflow to fund most of their activities. On top of that, they utilize debt but only in a moderate amount. It seems to be the case that their financing of operational activities is very well balanced which is very good from a long perspective.
15. How much debt does the company have?
Johnson & Johnson: Long term debt: $32.68B Shareholders equity: $64.47B ➤Debt to Equity Ratio: 0.50 ➤ This is a low value which is very good and indicates that they don’t have too large of a debt burden.
16. What is their Piotroski F-Score?
Johnson & Johnson: 6/9 ➤ This is a good score and overall quite average when considering the same for other firms in the industry.
17. What is their P/E-Ratio?
Johnson & Johnson: 30.24 ➤ This is a bit too high but not to an unacceptable degree.
18. What is their P/B-Ratio?
Johnson & Johnson: 6.80 ➤ For this firm this value is definitely too high, but this shouldn’t be a dealbreaker. The main reason for such a high value according to this metric is the book value being an accounting value and as a result, not being clearly defined.
19. What's with their EV/EBITDA ratio?
Johnson & Johnson: 16.52 ➤ This is also another high value but not yet at unacceptable levels.
Johnson & Johnson: 5.52% ➤ This is a low percentage resulting from a higher estimate of valuation which is of course good.
Johnson & Johnson: 15/20 ➤ Relatively speaking, this is a great score seeing as how the company is under-valued after all. JNJ also has a very promising growth horizon full of possibilities and a consistently growing dividend which further attributes to the strength of this company as a solid investment for one's long-term portfolio.
All the information provided is personal opinion and not directly applicable financial advice. I have no ties to the above company and am not being compensated on their behalf for the writing of this analysis. You should make your own decisions based upon evidence and what you believe is best for you and your financial well-being i.e., conducting your own due diligence.