Johnson&Johnson BY brtan620 Ticker: ??? JNJ:US Recommendation: Buy price: 90. 4 price Target: USD 110. 13 2010 2011 2012 2013F 2014F 201 5F 2016F 2017F In million Revenue 61 ,587 65,030 67,224 70,237 73,385 76,674 80,111 83,702 Net income 13,334 9,672 10,853 IZ178 13,665 14,962 16,789 13. 79% 8. 68% 9. 19% 8. 74% 8. 53% 9. 10% 8. 34% 8. 20% ROE% 24. 28% 16. 08% 17. 34% 16. 32% 16. 45% 16. 50% 16. 65% 17. 09% Source: Company data and team’s estimates Highlights Valuation indicates a buy signal: The JNJ stock is currently undervalue and expect to outperform in the future.
The actual price is $90. 40 compare with the target price of 110. 13; we will get 21. 82% gain from buying this stock. The historical earnings show the company has growth every year, therefore we expect the company to have high potential growth in the future as well. Experienced company: Johnson & Johnson was founded in 1886 and listed on the NYSE in 1944. Throughout these 127 years, Johnson & Johnson have built up a solid based in the industry. It has faced many obstacles in the past and it is able to overcome them.
By investing in this stable company, there is a low default risk. Dominate the market: By comparing Johnson & Johnson with its competitors, such as Pfizer, Novartis, and Covidien, we see that Johnson & Johnson is far away successful than these competitors. Johnson & Johnson has widely expanded its stores internationally, in which not every company could afford. In addition, JNJ’s strong capital base is strength against other small heath care businesses. By having strong capital based, JNJ is able to compete when there is competitor appear in the market.
Source: Google finance Source: Yahoo finance Johnson & Johnson incorporated in 1887 in New Jersey in the Biotechnology and Drug industry. Known as the most diversified company engaged in the research and evelopment, manufacture and sale of a broad range of products in the health care field is celebrating its presence around the world with over 230 subsidiary companies such as Janssen-Cilag B. V. (Netherlands), Janssen -Ortho Inc. (Canada), Johnson & Johns on AB (Sweden), Johnson & Johnson Limited (India), McNeil Europe (Germany) and many more. fgurel) Structured under the principles of decentralized management, company is divided into 3 segments: Consumer that includes variety of health care product for different life stages as well as nutrition and prevention merchandises, Pharmaceutical which roducts are sold for the prescription by the retailers and through the wholesale and health care professionals includes anti-infective and diseases curing products, vaccines and contraceptives, Medical Devices and Diagnostics segment (fgure2) Throughout many acquisitions, listed in Figure3 Johnson & Johnson became one of the largest manufacturing company of the generic drugs.
Expending market share is not the concern only for the drug manufacturing segment of the company. Through the latest acquisition, in June of 2012, Johnson & Johnson purchased Synthes, Inc (cost of almost $20Billion). The ultimate goal of that procurement was to gain stronger leadership in the emerging markets. By combining new purchase with already owned DePuy franchise Johnson & Johnson created the subsidiary that will bring innovations to the marketplace of orthopedics and neurologic.
Focused on the wellbeing of the world citizens, Johnson & Johnson established organization that is diversified through the elite of the employees that resemble the diversification in the customers. Having team that understand the needs of its customers enables the connection with the communities especially since the nternational subsidiary companies are managed by the citizens of these countries. By following the strategic principles (Appendixl) company ensures that the social and environmental responsibilities are met and excelled.
Although Johnson & Johnson is commonly known for its customer products differentiated for skin, women’s, oral, baby care during the year 2012 in comparison to 2011 medical devices and diagnostic franchise sales were much higher than the customer product sales. The sales of the latest products actually decreased in comparison to the sales from 2011 (figure4) Due to the international scope of the company the risk that is associated with the calculation if the credit risk is greatly enlarged.
Especially with the recent trade and industry challenges that has aroused due to the crisis in Southern European region payments on the accounts receivables have been instable and greatly smaller than in years prior to crisis. Another great risk in the international trading the company is facing is the currency risk. Fluctuations in the currency company is hedging by entering into swap contracts as the spread in the changes of interest rates doesn’t interest rate go up or down in relation to foreign rates
Industry Overview and Competitive Positioning For the last five years companies in the biotechnology and drug industry experience high increase in volume of the capital. This is due to the revolutionary technology, progressions in the research of the human genes as well by the many new products being approved by the food and drug administration. Due to the increase in the capital of the firms in the biotech and drug industry the business model needed modifications.
The change was greatly anticipated by the large and medium companies which instead of waiting for the up-front costs and milestone payments rom the larger pharmaceutical companies were able to finance their own research and development by the capital raised within the firms and through the private investors. Influence in the promotional activities was also achieved by co- development or independently creation of the marketing plans and then execution of those.
More than a half of the companies in the biotechnology and drug industry that were publicly traded had less than two years of cash comparing to year 2001 when more than half of the companies had three years or more of cash devoted to the research and development founding. It represents massive financial challenge for the firms to stay strong on the market and represent effective management of that capital in order to provide satisfactory return to its investors. What goes along with this challenge is to improve results on current projects and excel in new developments.
Finding a niche in the market place and sufficiently responding to it allow the companies to expand its market share. Companies in this industry tends to be on watch for new technologies and open for acquisitions. Whether the acquisitions are of technologies itself or of the companies as a whole. Within the biotechnology and drug industry, there are many well know companies with the high sales and revenues, that Johnson & Johnson is competing on the worldwide market. Following are the international companies that provide the best comparison as they are rivals at the close level of diversification. figure5) The firms compete to acquire the most of the market shares and as a result to provide the highest returns to its shareholders is made on the international basis with differentiated products. In the Apendix 2 you will see the comparison of the important ratios of the competitors reviewed below. Pfizer The company Just released information on the prospecting generic drug to be available by 201 5 and to substitute the one still under the patent called Lipitol. The company expects enormous revenue increase, for the sale of previously mentioned generic drug, to total over $3 Billion.
In terms of the revenue for the year 2012 Pfizer returned revenue of only 10Billion less than Johnson & Johnson. Company represents enormous growth in earnings throughout the last three years. Since 2011 EPR had Bayer For the extensive time Bayer company has been conducting research studies for the new treatment on abnormally high blood pressure. The drug known as Roiociguat introduced for the inpatient testing in 2011 so far provides satisfactory results. Top three companies based on the revenue for 20112 include Bayer however, even though the company presents revenue of $40Billion for 2012 it return on asset for that year was only $4. 0 for every $1 in assets company owns. Sanofi Recently company has introduced the updated version of the insulin for the diabetics. The company positioned itself as the second largest in diabetes market. Just over the last year company achieved a 20% increase of sales of this updated product. Based on the revenues of $36Billion for 2012 we can define Sanofi as the medium size within the biotechnology and drug industry. Companys revenue is only half of what Johnson & Johnson’s revenue have been for the year of 2012 and so is the return on equity.
This shows that the company management of the capital invested is not as efficient as the excelling company with 17. 81% Novartis Being a global company Novartis is challenging diseases of the developing world. Focusing on the diseases that are forgotten by the companies that mostly seek market share in developed countries, is aware of the potential market share by eveloping treatments to cure malaria and other tropical diseases. Covidien Covidien recently completed a spin out of its segments and is no longer competing on the drug platform.
Focusing all its power on the medical device. Even though the company has had an increase of only 4. 26% in EPS since 2011 Covidien has exceeded the average industry rate offering 3. 92 in earnings per share. Compering to the one of the largest rival, Pfizer, which only provided 1. 94 in EPS for the year of 2012 with the revenues at 12Billion for the same year shows enormous ability to evolve and increase the return on investments. Even though each of the companies have individual goals and ways of earning market share they all stay strong within the industry.
Investment Summary Fundamentals and valuation Use fundamental data analysis to validate all available fundamentals of Johnson & Johnson to find out if markets are presently mispricing the organization. We found thirty-eight available reported financial drivers for Johnson & Johnson which can be compared to its competitors. To make sure the equity is not overpriced, please check out all Johnson fundamentals including its Total Debt, Number of Employees and the Johnson has Price to Earning of 23. 6 times, we strongly advise you confirm Johnson & Johnson regular market performance to make sure the company can sustain itself down the road. Johnson Johnson retains regular Real Value of $104. 56 per share. The prevalent price of the corporation is $90. 445. At this time the corporation appears to be undervalued. Macroaxis calculates value of Johnson Johnson from evaluating the corporation fundamentals such as Current Valuation of 235. 4B, Return On Asset of 9. 37% and Return On Equity of 15. 76% as well as inspecting its technical indicators and Probability Of Bankruptcy.
In general, we encourage to acquire undervalued assets and to sell overvalued assets since at some point stocks prices and their ongoing real values will come together. has a business model to support its growth As a major player in three market segments and with a focus on the full continuum of care??”prevention, diagnosis and treatment ??”Johnson & Johnson competes in fully one-third of the global health care marketplace. Our breadth helps drive consistent performance and enables us to pursue growth opportunities??”including in some of the fastest growing segments of health care ??”wherever they arise.
It allows us to espond to purchasing trends with governments and large customers. Perhaps more important, it allows us to think about patient care holistically, drawing on insights from multiple perspectives in a disease category. In the end, being broadly based allows us to stay true to Our Credo in the face of an ever-evolving health care environment. At Johnson & Johnson, our focus is on managing for the long term??” building the long-term equity of our brands, building sustainable customer loyalty and building shareholder value over time.
As a result, 70% of our sales are from products that are #1 or #2 in global market share. Key to this long term approach is disciplined portfolio management??”maintaining focus on specific therapeutic areas and building a critical mass of innovation in those areas. Indeed, we invested $7. 5 billion in R in 2011 and have one of the strongest new product portfolios in the industry. Approximately two-thirds of our growth over the past 10 years has come from organic growth tied to innovation, with the balance coming from licensing, partnerships and acquisitions.
Our decentralized management approach is based on our belief that our leaders??”those closest to patients and customers??”are in the best osition to understand and address their needs. This philosophy has been critical to our global expansion. Our R centers in emerging markets develop products based on local insights and patient needs??”often starting with one of our powerful global brands. We’re expanding our product offerings to meet the unique needs of the growing middle-class and emerging markets in high-growth countries.
Our people and values are the common thread behind Our Credo, our strategic principles and our growth drivers. Johnson & Johnson people are engaged, caring and committed. The unique Johnson & Johnson culture and the values are inspired by our company’s Credo. They are complimented by extensive efforts to cultivate and develop the talents of our people. At Johnson & Johnson, we are committed to attracting, developing and retaining the very best talent??”talent that fosters our aspiration and growth0NJ) has a highlights strategies for growth Innovation at Johnson & Johnson means products, but it also means solutions.
Johnson’s global revenue comes from products introduced within the past five years. Meaningful innovation derives from the insight and spirit of our employees, and their ability to anticipate and understand the needs of our patients and customers and hat they value. That impacts both what we do, and how we do it. So, while Johnson & Johnson will remain a leader in Research & Development, we are increasingly focused on being innovative in how we bring products to market, the kinds of partnerships we develop and how we operate our business. At Johnson & Johnson, innovation is everyone’s responsibility.
Johnson & Johnson is truly a global company, managing facilities in some 60 countries, and selling products in about 200. We touch more than one billion people around the world every day, but helping the next billion people might not be so easy. In the developing world, income levels, while growing rapidly, are lower. Unmet health care needs abound. Demand for health care in these markets is growing three or four times faster than developed markets. While we are headquartered in the U. S. , our mindset is global??”we’re focused on new products, new technologies and new business models that truly connect with the way our customers live.
Already, 55% of Johnson & Johnson’s business comes from outside the United States; and that proportion continues to grow. In this new world, our focus is on expanding our presence to help more people and delivering health care in a ustainable way. Nowhere is the need for excellence in execution more critical than in health care. Strategy is only as good as the ability to execute flawlessly??”focusing and setting priorities; doing the right thing, not Just getting it done; meeting milestones; delivering on commitments.
Excellence in execution starts with quality, a top priority at Johnson & Johnson and one embodied in Our Credo by a commitment that “everything we do must be of high quality. ” It must permeate everything we do, from operational procedures, to the actions of each employee. Our strategies, usiness plans, organizational structures and everyday decisions recognize the need to focus resolutely, then execute with excellence. Our Credo and aspiration drive us to create innovations that significantly impact human health and well-being.
They ground our roles as professionals in a larger purpose, and put significant responsibility on each of us as leaders. Johnson & Johnson fosters great leadership through strong talent development programs, offering leadership opportunities around the world. This is where our commercial interests and sense of social responsibility intersect. Everything we do??”expanding globally to serve more people, increasing access to our products, fostering innovation in our labs and commercial workplaces and building sustainability into our products and operations??”is designed to serve a greater good.
In the end, it is this commitment that attracts and motivates our people and differentiates us in the market. corporate governance is highly rated maintain a well-designed system of internal accounting controls, encourage strong and effective corporate governance from our Board of Directors, continuously review our business results and strategic choices and focus on financial stewardship. Please find more information regarding the J’s Corporate Governance and Corporate Social Responsibility in Appendix 6.
Valuation Valuation of JNJ from two main models – DCF and Multiple methods We evaluated JNJ valuations are most appropriate for JNJ. For the Multiple methods, we use the average of Price per Earnings method, PEG method, and Enterprise Value to EBITDA. This is because these three methods offered reasonable and similar price range. Discounted Cash Flow Model: Free Cash Flow to Equity (FCFE) This method helps to identify how much cash and equity JNJ has for its shareholders, after paying all the debts and expenses. It shows how much a company really has, so it is a good valuation method to use.
Also, this method takes time value of money into consideration. By that, we could estimate JNJ’s future growth for the next five year and see whether this is a worth invest company. Five-Year Projected Cash Flow Assumptions We have used the historical data from 2010-2012 to calculate the average growth of the company. By using the given data, we establish a five year projection of the company from 2013-2017. We predict that JNJ will have constant 4. 48% growth in the next five years. Multiple Valuations: Price to Earnings Ratio (PER) This method is very common for investor to use in evaluating a company.
We use average PIE ration in the industry to multiple with JNJ’s EPS, then we get an intrinsic value of JNJ. Average PIE for similar companies is $20. 24. JNJ’s earning per share is $3. 68. We get $74. 47 as the intrinsic value at the end. Intrinsic value from PEG PEG method tells more about the company than the PIE ration method. It shows the relationship between the PIE ratio and the annual earnings growth. In terms of JNJ, we use PEG method to get the intrinsic value, $76. 18. This price is very close to PIE ratio’s intrinsic value. Hence, we believe these two methods are reliable to use.
We also include the Enterprise Value to EBITDA method, because we want to average three methods in the multiple methods section. This method offers us with an intrinsic value of $73. 51. This is much closed to the other two methods we picked. After averaging these three methods, we could get a more accurate intrinsic value of Conclusion We have average DCF price of $145. 54 and an average multiples price of $74. 72. To the get average price of these two methods, we combine them to get a target price of $110. 13. Comparing this price with the actual price of $90. 0, we get 21. 2% undervalue for JNJ stock. This indicates a Buy opportunity for JNJ stock. If we buy the INJ stock now, we will get 21. 82% gain in return. Risks to Price Target The DCF method offer us a very high intrinsic value compare to the current stock different from what we expect. Hence, the DCF intrinsic value might not be that reliable. Moreover, the multiple methods offer us a low intrinsic value compare to the current stock price. This shows that we shouldn’t buy this stock. All these mean that the price we target has a risk to be wrong. If the company didn’t do well in the future, its stock will fall.
In addition, the graph at the left shows JNJ moves in the same direction with S&P 500. If S&P500 falls, JNJ will fall in the future as well. Financial Analysis Johnson & Johnson demonstrates consistent earning power Earnings and dividend Johnson & Johnson shows impressive increase in its earnings. Its earning per share and dividend are projected to continuously increase, and to remain strong. JNJ has increased its EPS for roughly 15% from the fiscal year of 2011 to 2013. Increased in EPS indicates that JNJ is making money for its shareholders. JNJ’s dividend forecast for 201 5 is approximately $3 annually.
Steady Financial Performance Johnson & Johnson is able to increase its quick and current ratios for three consecutive years, as well as maintain a recommended rate of at least 1. 0. In year 2012, JNJ has 1. 88 ability to meet its short-term obligations; and 2. 38 ability to pay back its liabilities in respective to quick and current ratios. JNJ’s gross margin has declined from 2010 to 2013. The decrease in gross margin percentage denotes that the business is becoming less profitable. Aside from the gross margin, JNJ also has its total asset turnover, return on equity and asset decreased.
Reasons for these eclines might involve the risks like intense competition, patent expiration, and massive recalls. Another main reason can goes to its recent acquisition of Synthes, Inc. , with a total purchase price of $19. 7 billion in cash and stock (Appendix 1). Acquisition strategy as a source of growth Johnson and Johnson has successfully acquired other companies to expand its business. It has 250 subsidiary companies with operations in over 57 countries and products sold in over 175 countries. The acquisition strategy allows JNJ to achieve economy of scale since it is able to eliminate duplicated resources and technologies.
In addition, it helps JNJ to increase market power, overcome entry barrier, increase diversification and respond faster to market. All of these factors will help to boost JNJ’s overall performance. Financial Strength Johnson & Johnson has a diverse revenue base, both in term of products and geographic. JNJ has most of its revenue from the pharmaceutical segment that generates 47% of the revenue. Pharmaceuticals include products for infection prevention, dermatology, infectious diseases, and pain management. On the other hands, consumer includes baby care, skin care, and wound care; and medical devices