Current Price: ~ $65/share
Projected Yield: ~ 3.54%
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 close to 36% of total sales, we expect patent losses and the Synthes acquisition to reduce this proportion to approximately 27% during the next 10 years, with the device segment picking up the majority of the share.
Estimated WACC for the firm today is 7.16% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year
|
FCF
$Millions
|
2002
|
6077
|
2003
|
8333
|
2004
|
8956
|
2005
|
9245
|
2006
|
11510
|
2007
|
11939
|
2008
|
11906
|
2009
|
14206
|
2010
|
14001
|
2011
|
11405
|
Average Annual Growth FCF: ~ 8%
CAGR FCF: ~ 7%
Consensus Forecast Industry 5-Year Growth: ~ 7% per year
Consensus Forecast Company 5-Year Growth: ~ 6% per year
Internal Growth Rate: ~ 3%
Sustainable Growth Rate: ~ 6%
Scenario 1
Average FCF (2011, 2010) is $12703 million
Average FCF (2011, 2010) is $12703 million
- Start at $12703 million FCF
- Assume a 5-year growth rate in FCF of 6% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future cash flows, discounted at a WACC of 7.16%, give a present value for the entire firm (Debt + Equity) of $239496 million. If the firm's fair value of debt is estimated at $15585 million, then the fair value of the firm's equity could be $223911 million. $223911 million / 2750 million outstanding shares is approximately $81 per share and a 20% margin of safety is $65/share.
Year
|
FCF
$Millions
|
0
|
12703
|
1
|
13465
|
2
|
14273
|
3
|
15129
|
4
|
16037
|
5
|
16999
|
Terminal
Value
|
251581
|
The firm's future cash flows, discounted at a WACC of 7.16%, give a present value for the entire firm (Debt + Equity) of $239496 million. If the firm's fair value of debt is estimated at $15585 million, then the fair value of the firm's equity could be $223911 million. $223911 million / 2750 million outstanding shares is approximately $81 per share and a 20% margin of safety is $65/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 2% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
12703
|
1
|
12957
|
2
|
13216
|
3
|
13481
|
4
|
13750
|
5
|
14025
|
Terminal
Value
|
199730
|
- Present Value of the entire firm (Debt + Equity): $196233 million
- Value of Equity: $180648 million or $66/share
- 20% margin of safety is $53/share
Sources
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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