About the company
Headquartered in New Jersey, Johnson and Johnson is an American multinational that is engaged in the production and marketing of pharmaceutical and consumer healthcare products. The company operates under three segments, namely, Consumer, Pharmaceutical, and Medical Devices & Diagnostics that contributed 20.6%, 39.4% and 40.0% respectively to the company’s revenue during 2013.
Analyst Estimates
The major consensus among the leading market analysts is a ‘hold’ rating for the company’s stock amid its strong financial performance during fiscal year 2013. The company exited the year with revenue growth of 6.08% in comparison to the previous year and EPS multiple of $4.92. In addition, while the current price of the stock is $108.25/ share, the mean target being expected by the analyst is $107.81. Hence, the analysts are majorly agreeing over neutral position over the stock as amid the negative impact of currency fluctuations and poor performance of the medical devices segment, the company managed a sustainable increase in the product sales. Hence, the market analysts are expecting that despite of the price pressures likely to arise in 2014, the company with the help of its diversified business model, lack of cyclicality and strong financial position will be able to pave strong growth again in the coming quarters.
Income Statement Summary
With the help of below indicated Horizontal Income Statement, we can infer that during a year, the company had been successful in increasing their turnover by 6.08% and amid controlled increase of cost of sales by 3.16% only, the company was successful in increasing its gross profit by 7.47%. In addition, the overall profitability of the company increased by 31.55% amid controlled operating expenses.
Balance Sheet Summary
Referring to the horizontal balance sheet, we infer that during 2013, the cash position of the company improved by 40.35% while total assets improved by 9.34% that was induced by significant increase in total current assets and other long-term assets. On the other hand, the current liabilities of the company increased only by 5.82%, while total liabilities and stockholder equity increased only by 9.34%
Cross-Section Analysis
In this section, we will compare few of the popular market ratios with the industrial averages to evaluate the investment opportunity in Johnson and Johnson stock:
Analysis
Referring to the above data, we can indicate that stock is marginally overvalued than its current stock price as high Price-Book Value and high Price- Sales Ratio indicates that investors are paying high for the stock. Similarly, lower dividend yield and PE ratio than the industrial averages also concretes our conclusion that the stock is undervalued.
However, in order to theoretically validate our conclusion, we now calculate the intrinsic value of the stock through dividend discount model.
Dividend Discount Model- Refer to excel spreadsheet
Following the results of DDM valuation we found that the stock is undervalued as the intrinsic valuation of $115.73 exceeded the current stock price of $108.39. Hence, compiling the analyst estimates, comparison with the industrial peers and results of DDM valuation, we will also issue a rating of ‘Hold’ for the investors.
Works Cited
Johnson and Johnson Analyst Report. (2014, February 17). Retrieved December 1, 2014, from http://beforeitsnews.com/financial-markets/2014/02/johnson-and-johnson-inc-jnj-new-analyst-report-from-zacks-equity-research-zacks-equity-research-report-2675720.html
Johnson and Johnson-Industrial Peer. (n.d.). Retrieved December 1, 2014, from Morningstar: http://financials.morningstar.com/competitors/industry-peer.action?t=JNJ®ion=usa&culture=en-US
Price-To-Book Ratio - P/B Ratio. (n.d.). Retrieved December 1, 2014, from Investopedia: http://www.investopedia.com/terms/p/price-to-bookratio.asp
