Monday, January 17, 2011

Johnson & Johnson - Good value with a margin of safety


I believe $JNJ, at approximately $63/share, is a good value with a margin of safety.

Johnson & Johnson ranks as the world's largest and most diverse health-care company. The company comprises three divisions: pharmaceutical, medical devices and diagnostics, and consumer. While the pharmaceutical division currently represents 35% of total sales, we expect patent losses to reduce this proportion to 30% over the next 10 years, with the remaining divisions picking up equal share.
(Source: Morningstar.com)
I estimated the firm's WACC at 8.94% using the Capital Asset Pricing Model and the company's recent SEC filings. ValuePro has an online baseline WACC calculator at http://www.valuepro.net/index.shtml. It calculates $JNJ's WACC at 6.81%. Factor in a margin of safety and go with the higher figure: 8.94%.
Recent free cash flows and noted growth rates:
YearFCF $Millions
20004917
20017133
20026077
20038333
20048956
20059245
200611510
200711939
200811906
200914206
TTM15579
Average Annual Growth: approx14%
CAGR: approx 13%
Internal Growth Rate: approx 8%
Sustainable Growth Rate: approx 17%
Consensus Forecast Industry 5-Year Growth: approx 10% per year
Consensus Forecast Company 5-Year Growth: approx 6% per year
Go with the forecast 5-year growth rate of 6% per year, and assume that after the next five years, the company achieves no growth or 0% growth per year forever; a harsh no growth assumption for $JNJ.
Discounted Cash Flow Valuation
YearFCF $ Millions
015579
116514
217505
318555
419668
520848
Terminal Value247194
The firm's future cash flows, discounted at a WACC of 8.94%, give a present value for the entire firm (Debt + Equity) of $232,913 million. If the firm's fair value of all debt is estimated at $13,431 million, then the fair value of the firm's equity could be $219,482 million.
$219,482 million / 2,750 million outstanding shares = $79.81 per share. A 20% margin of safety from here is approx $64 per share and $JNJ's current share price is approx $63. I consider $JNJ a good buy with a margin of safety for the long term.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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