JOHNSON & JOHNSON Stock Report, Valuation and Competitive Analysis

We first look at the growth oportunities these companies provide. To estimate future growth we look at historic growth, the investment in future growth through research and development, acquisitions and capital investments, how well management invests the corporations capital and equity as well as the ability for operations to sustain itself.

• Historic Growth Rates: Revenue (chart it) In the past 5-10 years, Johnson & Johnson has had the most consisten growth in revenues and Profit (chart it) of all the companies being compared. Merck has had a resurgence of late, and Pfizer is extremely inconsistent. For comparison purposes we included a Celgene, a much smaller high growth company Revenue Growth (chart it)
• Investment
  Management needs to invest in a company if it's going to grow.
  • Let's look atR&D (chart it)
  • Acquisitions(chart it). Pfizers enormous acquisition in 2003 has not generated the profit and revenue growth one would expect from an acquisition that size.
  • and Capital expenditures(chart it)
  We can see that Johnson & Johnson consistently invests the most for the future.
• Management Effectiveness
  • Let's look at management's effectiveness first from the point of view of the investors, Return on equity (chart it)
  • Then from the companies point of view Return on capital (chart it)
  • A clearer picture emerges when we make some adjustments as described below Adjusted return on equity (chart it) and Adjusted return on capital (chart it)

  Merck and BMS are surging of late probably because some past investments are finally bearing fruit and decrease in recent investments. J&J belongs amongst the best for the past five years and probably into the future.

• Conclusion
  • Johnson & Johnson provides the best opportunity for the conservative long term investor. The risks of default etc. are minimal The biggest risk to your investment in J&J is paying too much for it. Comparing current market prices agains this valuation suggests that J&J is fairly valued at this moment. My policy is to wait until the price is discounted by at least 10% - 20% so I will wait for that to happen.
  • Celgene however is much more exciting as a potential high growth investment, with no real risk of default. It's the next on my list to value. Stay tuned.

The biggest risk to any investment is the complete loss of that investment through bankrupcy. That's why we look at leverage risk first. In addition we want to make sure that a corporation can fund it's near term liabilities without having to go to the credit markets.

• Leverage risk Let's look at Debt or Leverage (chart it), Debt to Equity (chart it) and Debt to Capital (chart it) ratios.

  Johnson & Johnson's debt has increased dramatically of late, but compared against equity it's average to what the others have. Considering how cheap loans are these days it's a smart way to get cheap capital. With it's reputation JNJ is probably amongst the few that can get loans easily in the current financial climate.

  Notice that Celgene has no debt.

• Short term Risk
  First, the risk ratio's.
  • The acid test determines a company's ability to pay near term liabilities with it's current assets. The first only looks at cash and cash equivalentsAcid test (chart it) and the more liberal version that assumes inventory and accounts payable can be used to cover liabilities as well Acid test 2(chart it). Higher values are better, above 2 is preferred.
  • We also want to know if a company is consistently able to meet it's financial obligations, in particular it's interest payments.Interest coverage ratio(chart it) J&J's negative values are anomalies caused by interest revenues generated in those periods.
• Operations We always want to look at operations, are products moving and are vendors paying for product? The metric that captures this best is the cash conversion cycle Cash conversion cycle (chart it). It consists of the following.
  • Inventory: Days inventory outstanding (chart it) -- Inventory levels in days
  • Acounts payable: Days payable outstanding (chart it) -- How quickly are they paying their bills.
  • Accounts receivable: Days sales outstanding (chart it) -- How quickly are vendors paying for product.