Does Johnson and Johnson exhibit a MOS?

[collegeinvestor]

Let me know how I can make my analysis more objective. I want to create a system that allows me to know whether or not a company is undervalued. Any help is really appreciated. I’ll start with the quantitative, then move to the numbers. I would like to hear everyone else’s opinion with facts to back their claim as well!

 

Qualitative:

Consumer products: If you go into any pharmacy/consumer care store their stuff is plastered all over the store. From band-aid to Tylenol you know these consumer staples are not going anywhere soon. To invert, they only have about 2 billion in cash on the books as of January, 31, 2009. They don’t have the cash to buy any brands. On the pharma side they have a lot of medicines that I luckily have not heard of :( . Anyways the big news is that Berkshire Hathaway sold half of their 48 million-share stake in the company to fuel the BNSF investment.

 

Quantitative:

Since 2000 the stock has traded from a p/CF at 22.6 per share and today in 2009 the stock is trading at roughly 10.9 per share. Equity has increased from roughly 18 billion to 50 billion currently. If price follows value what is going on? Has the price followed value or is the market skewed? I am sure there are professionals that focus their whole life on analyzing this one stock.

 

Anyways if you take the enterprise value of the company .  The company currently has an enterprise value of roughly 176 billion when you include cash+ equivalents minus notes payable (SR debt) + long-term debt. The company reeled in 14.206 billion in free cash flows / EV (176 billion) to get a yield of roughly 8%! This is pretty ridiculous. In addition the company has increased free cash flows from roughly 5 billion today to 14 billion in 2009. Why is this stock trading so cheaply!

 

If you were to grow this company at say 8 percent a year ( a figure almost half the current ROA) for the next 10 years you would get earnings of roughly 4.40(1.08)^10=  9.50. Lets say the stock market valued this company even lower than it is today with a p/e of 10 you would get a market value of 95.00.  This is with an earnings growth rate that is very conservative based on the previous 10 years. If you were to figure out the yield you would get you would have a figure of 4 percent before dividends. If you included dividends of 3 percent for the next 10 years your investment will technically double every 10 years with no work. This is before any inflation (which we know will happen with government spending.  So why is this stock trading so cheaply? Or am I missing something.

 

[collegeinvestor]

I mean Warren Buffet obviously knows that b/c he sold 1/2 his stake for another company. So he obviously knows more than me. Yet cash flows have been increasing. Perhaps he doesn't think they can sustain those cash flows. Maybe he thinks their pharma pipeline isn't as strong as it used to. I just wanted other people's opinions with actual figures to say this stock is fairly valued. If you were to conservatively predict the growth of this stock based on past results you would get a fairly undervalued co. Thanks.

[oldye]

Berkshire has some very large unrealized gains on some of their other stocks so you won't see them sell unless something materially changes about the companies.  Unlike JnJ where they had no unrealized gains coupled with the fact that JNJ gets 40% of revs from pharma, 31% of operating profit, from what is essentially  intelligent speculation that costs 4-5 billion dollars each year in R&D.

Take a look at their future pipeline of drugs:

http://files.shareholder.com/downloads/JNJ/878167992x0x345048/f43507f5-0f3a-48b5-a101-98e2b79ec03a/Q42009pipeline.pdf

I'm sure Warren Buffett has no clue what drugs will be successful and how much they'll be making from pharma 10 years from now.  Remember that JnJ is only cheap if you consider these earnings recurring, while likely are not nearly certain!

 

 

Also I'm not sure where you are looking but JnJ has about 18 billion in cash and they can always use their stock for acquisitions, you don't have to worry about that when you control the company.  It'll take a while for Berkshire to generate 8% free cashflow from the purchase price of BNI but like most of his acquisitions they'll eventually get there.  

[Guest Bronco]

Everyone has to determine what price gives them value, but JNJ is the best pharma company in the USA.  Abbott Labs is #2.

 

 

[SharperDingaan]

 

Keep in mind:

 

Recent healthcare reform can only restrict J&J's growth over the next few years. Generic versus proprietal drugs, holistic versus interventional approaches, better & more efficient diagnosis. It’ll be harder to sell an expensive drug/treatment (most of the drug pipeline?), and in volume. Still a good business - but not as good as it used to be, & probably near its fair valuation relative to future prospects. Selling eliminates a lot of risks.

 

SD