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.
I estimated the firm's WACC today at 8.64% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
| Year | FCF $Millions |
| 2001 | 7133 |
| 2002 | 6077 |
| 2003 | 8333 |
| 2004 | 8956 |
| 2005 | 9245 |
| 2006 | 11510 |
| 2007 | 11939 |
| 2008 | 11906 |
| 2009 | 14206 |
| 2010 | 14001 |
Average Annual Growth: approx 9%
CAGR: approx. 8%
CAGR: approx. 8%
Consensus Forecast Industry 5-Year Growth: approx. 12% per year
Consensus Forecast Company 5-Year Growth: approx. 6% per year
Consensus Forecast Company 5-Year Growth: approx. 6% per year
Assuming the company achieves a 5-year growth rate in FCF of 6% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
| Year | FCF $ Millions |
| 0 | 14001 |
| 1 | 14841 |
| 2 | 15732 |
| 3 | 16675 |
| 4 | 17676 |
| 5 | 18736 |
| Terminal Value | 229807 |
The firm's future cash flows, discounted at a WACC of 8.64%, give a present value for the entire firm (Debt + Equity) of $216,893 million. If the firm's fair value of debt is estimated at $17,773 million, then the fair value of the firm's equity could be $199,120 million. $199,120 million / 2750 million outstanding shares is approximately $72 per share and a 20% margin of safety is $58/share.
Sources
Morningstar.com
Morningstar.com
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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