Yield: ~ 2.56%
Johnson & Johnson is a holding company, which is engaged in the research and development, manufacture and sale of a range of products in the health care field within its Consumer, Pharmaceutical and Medical Devices, and Diagnostics business segments.
Estimated WACC for the firm today is 7.50% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year
|
FCF $Millions
|
2004
|
8956
|
2005
|
9245
|
2006
|
11510
|
2007
|
11939
|
2008
|
11906
|
2009
|
14206
|
2010
|
14001
|
2011
|
11405
|
2012
|
12462
|
2013
|
13819
|
Average Annual Growth FCF: ~ 6%
CAGR FCF: ~ 5%
Consensus Forecast Industry 5-Year Growth: ~ 12% per year
Consensus Forecast Company 5-Year Growth: ~ 7% per year
Internal Growth Rate: ~ 6%
Sustainable Growth Rate: ~ 11%
Scenario 1
- Start at $13819 million FCF
- Assume a 5-year growth rate in FCF of 7% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future free cash flows, discounted at a WACC of 7.50%, give a present value for the entire firm (Debt + Equity) of $260565 million. If the firm's fair value of debt is estimated at $15013 million, then the fair value of the firm's equity could be $245552 million. $245552 million / 2830 million outstanding shares is approximately $87 per share and a 20% margin of safety is $70/share.
Year
|
FCF $Millions
|
0
|
13819
|
1
|
14786
|
2
|
15821
|
3
|
16929
|
4
|
18114
|
5
|
19382
|
Terminal Value
|
276333
|
The firm's future free cash flows, discounted at a WACC of 7.50%, give a present value for the entire firm (Debt + Equity) of $260565 million. If the firm's fair value of debt is estimated at $15013 million, then the fair value of the firm's equity could be $245552 million. $245552 million / 2830 million outstanding shares is approximately $87 per share and a 20% margin of safety is $70/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 11% per year, then 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF $Millions
|
0
|
13819
|
1
|
15339
|
2
|
17026
|
3
|
18899
|
4
|
20978
|
5
|
23286
|
Terminal Value
|
344403
|
- Present Value of the entire firm (Debt + Equity): $315975 million
- Value of Equity: $300962 million or $106/share
- 20% margin of safety is $85/share
Sources
Disclosure: I have no real positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
