Friday, February 25, 2011

Johnson & Johnson: $JNJ valuation update

Johnson & Johnson ($JNJ) filed a 10K annual report today so here's a quick update to my $JNJ cash flow valuation previously posted on January 17.  This update incorporates the firm's year-end 2010 data.  I believe $JNJ is undervalued now at $60/share and fairly valued at $72/share.    

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:
YearFCF $Millions
2003 8333

Average Annual Growth: approx 9%
CAGR: approx. 8%
Consensus Forecast Industry 5-Year Growth: approx. 12% 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
YearFCF $ Millions
Terminal Value229807

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.

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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