Saturday, January 27, 2007

Johnson and Johnson (JNJ) Analysis

JNJ is a large company that has excellent profits, strong balance sheet but is growing somewhat slowly. Johnson & Johnson’s worldwide business is divided into three segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. From its 10-K, the business can be described as follows:

Johnson & Johnson and its subsidiaries have approximately 115,600 employees worldwide engaged in the manufacture and sale of a broad range of products in the health care field. Johnson & Johnson has more than 230 operating companies conducting business in virtually all countries of the world. Johnson & Johnson’s primary focus has been on products related to human health and well-being. Johnson & Johnson was incorporated in the State of New Jersey in 1887.
The Company’s structure is based on the principle of decentralized management. The Executive Committee of Johnson & Johnson is the principal management group responsible for the operations and allocation of the resources of the Company. This Committee oversees and coordinates the activities of the Consumer, Pharmaceutical and Medical Devices and Diagnostics business segments. Each subsidiary within the business segments is, with some exceptions, managed by citizens of the country in which it is located.

For the last ten years, the company has never traded at a P/E < 20. This changed in 2005 and 2006 - where the company has traded for a P/E of about 17. Let us look at the JNJ business in some detail and then look at the various valuation ratios and future outlook. The earnings by different segments were as follows. Consumer segment contributes about 10%, pharmaceuticals provides about 45% and medical equipment provides the remaining 45% of revenue for JNJ. Let us look at the growth of each of the segments in 2006 and profitability to see how things stack up. In 2006, the consumer segment grew by 6.2% worldwide, pharma sector grew by 2.8% worldwide and medical devices segment grew by 5.9% world wide. As expected, the growth in the international segment outpaced the domestic segment in all categories. The overall revenue growth world wide was 4.6% year over year. The profit growth world wide was at a slightly higher level at 11.9% year over year. The EPS has increased at the rate of ~11% year over year for the past four years. The top line revenue has increased at the rate of only 5.6% for the past four years. The operating cash flow has increased at the rate of 5.5%. The free cash flow has increased at a slightly higher rate of 5.7%. Share holders equity has increased at the rate of 10.6% for the past four years. The return on equity has been consistently high at around 25%+/year. The return on assets is also pretty good at around +15%/year. The company gives away 40% of the earnings in dividends. The company's margins have also been increasing steadily and stand at around 27% at the moment. The company, while having good prospects, isnt as cheap as it used to be early/mid last year.

Valueline did an independent study that shows the strength of JNJ's balance sheet and also projects future share price growth. Share buy backs as the shares dip or as acquisitions can also add to share holder value. The main ding against the stock is that the top line growth has slowed significantly. Although the balance sheet is strong, the prospect of slow growth is keeping investors away from this stock.

Sunday, January 21, 2007

Investing in 2007 - asset class comparison update

In the article a couple of weeks back, we compared various asset classes and nted the P/E ratios of various funds. Vanguard has finally released the information of their ETFs as of 12/31/06 and the information released by Vanguard is different from what we have noted in this blog. So, in this article, we will go and update the P/E ratios as noted by Vanguard. For the international segment, Vanguard hasnt published information on these ratios.

Large Value

VTV - P/E of 14.7x, P/B of 2.3x, earning growth of 15.6% and ROE of 18.4%

Large Blend

VV - P/E of 17.4x, P/B of 2.9x, earning growth of 18.8% and ROE of 18.8%
VTI - P/E of 17.9x, P/B of 2.9x, earning growth of 18.5% and ROE of 17.9%

Large Growth

VUG - P/E of 21.5x, P/B of 3.9x, earning growth of 22.6% and ROE of 19.1%.

Mid Cap Value:

VOE - P/E of 16.4, P/B of 2.0x, earning growth of 13.2% and ROE of 13.2%

Mid Cap Blend:

VO - P/E of 19.1x, P/B of 2.7x, earning growth of 17.8% and ROE of 15.5%

Mid Cap Growth:

VOT - P/E of 23, P/B of 3.9x, earning growth of 23.2% and ROE of 17.6%.

Small Cap Value:

VBR - P/E of 18.9, P/B of 1.9x, earning growth of 10.5% and ROE of 10.5%.

Small Cap Blend:

VB - P/E of 22.4, P/B of 2.4x, ROE of 11.7% and earning growth of 15.7%.

Small Cap Growth:

VBK - P/E of 27.6, P/B of 3.5x, ROE of 12.8% and earning growth of 23.4%.

Tuesday, January 16, 2007

Diamond as an investment?

Diamonds are associated with romance and marriage - thanks to a successful marketing campaign by De Beers, a South African company.

However, of late, the man made diamonds are getting better and are likely reduce the value of diamond as an investment. A better investment is likely precious metals like gold or silver which have to be mined and cant be manufactured in a laboratory.

As the articles in Chemical Engineering News and the more main stream MSN Money show, the man made diamonds are getting to be more mainstream and less expensive than the mined diamonds. It is conceivable that the price points for diamonds will drop significantly in the next ten - twenty years as man made diamonds get to be more mainstream.

Sunday, January 14, 2007

Walmart or Microsoft?

This is a comparison of Walmart and Microsoft to see which one is a better bet for the nex five years. If we are expecting 10% return per year for the next five years for 50% total return, the stock price apprecition would be as follows:


31 * 1.5 == 46.5


47 * 1.5 == 71

Let us look at the top line growth - Walmart is growing at a rate of 8% at the top line where as Microsoft is growing the topline at 7% per year.
Looking at the bottom line, both Walmart and Microsoft have grown at around 9% per year.

However, Walmart's free cash flow has increased year over year and by about 25% in the past five years. Microsoft's cash flow has declined or remained the same in the past five years. This year, Walmart has taken a special one time charge of 850 million to get out of the German and South Korean markets. This will not show up in the balance sheets next year.

Lastly, let us look at the margin of safety provided by the two stocks. Walmart provides about 20% margin of safety where as Microsoft provides no margin of safety at current prices.

Saturday, January 13, 2007

Walmart (WMT) Analysis

We looked at Walmart and compared it to almost a year ago. The analysis is available at the following link.

In the one year, Walmart has remained stagnant with a lot of negative press and stagnant earnings. The earnings have remained stagnant as Walmart has started pulling out of markets such as Germany where it hasnt been successful. The special charges for discontinuing operations have caused the earnings thus far this year to be somewhat lower than last. Amazon on the other hand has declined from a higher price of $45 to a lower price of $38. still looks pricy and has room to move lower. In this article, we will look at the fortunes of Walmart and see how does it look from an investment view point.

For the first nine months of 2006, the top line revenue growth at Walmart increased by 11% compared to 2005. The operating margin for the first nine months of 2006 is 5.7%. This compares to the operating margin of 5.81% in 2005. The decline in margins is slight and was expected as Walmart tried to increase its same store sales. The company has taken a charge of 894 million to withdraw from unprofitable markets that is expected to be a one time event. As a result of this charge, the bottom line growth is about 6.4% - this excludes the per share loss from discontinued operations.

The share holders equity year over has increased by 17.7% and has increased by 10.5% in the first nine months of the year. The international sales made 22% of the sales volume for Walmart and is also the fastest growing segment. Although Walmart had to close its German and South Korean operations, it is expanding in South America, Japan and China. It also has plans to enter the Indian market through a joint venture with an Indian company.

Walmart's international operations increased by 30% year over year. Walmart's domestic sales increased by 8% year over year. Sam's club was comparitively stagnant with a growth of 4.5% year over year. Although Walmart's gross margin increased year over year, it didnt translate into the bottom line. The capital expenditures by Walmart were about 11 billion dollars while the amortization is about 4 billion dollars. This means the company is spending more money on expansion.

Looking at the last five years, EPS has increased at the rate of 9% per year. The return on assets has been somewhat lower at 8 and 9% respectively. The return on equity has been doing good at around 20%. The company gives away 25% of its earnings as dividends. The top line growth will probably be in the high single digits at around 8-9% per year with bottom line increases in low double digits - in the 10-12% per year for the next five years. This would mean EPS growth to about 4.7 dollars at the low end and 5.15 dollars at the higher end. A P/E of 15 would value the stock between $70 and $77 respectively. A return of about 40 - 45% over the next six years should be possible for this stock and especially fiscal 2008 should be good as the one time 800 million charge will not be in the books.

Investing in 2007 - comparing various asset classes

In this segment, we will look at the P/E ratios of various asset classes we discussed in December. The data is updated at end of December, 2006 and the market movement since then has been more or less flat with slight positive/negative movement. We will look at each of the segments and see which ones are under/over valued.

First the large caps. The funds in this segment have been analyzed earlier.

Large Value:

IWW - has a P/E of 14.02 and expense ratio of 0.25%
VTV - has a P/E of 13.02 and an expense ratio of 0.11%
SDY - has a P/E of 16.35 and an expense ratio of 0.3%

Large Blend:

VV has a P/E of 15.31 and an earning yield of 1.67%. Expense ratio is 0.07%
IWV has a P/E of 16.37 and an earning yield of 1.43%. Expense ratio is 0.2%
VTI has a P/E of 15.47 and an earning yield of 1.64%. Expense ratio is 0.07%.

Large Growth:

IWZ has a P/E of 19.68 and an earning yield of 0.83%. The expense ratio is 0.25%.
VUG has a P/E of 18.91 and an earning yield of .91%. The expense ratio is 0.11%.

Next the mid cap segment.

Midcap Value:

IWS has a P/E of 15.75 and an earning yield of 1.83%. The expense ratio is 0.25%.
EMV has a P/E of 15.56 and an earning yield of 2.12%. The expense ratio is 0.26%.

Midcap Blend:

IWR has a P/E of 17.97 and an earning yield of 1.31%. The expense ratio is 0.2%
VO had a P/E of 19.3% and an yield of 1.2%. The expense ratio is 0.13%.

Midcap Growth:

IWP has a P/E of 20.47 and an earning yield of 0.7%. The expense ratio is 0.25%.
EMG has a P/E of 19.11 and an earning yield of 0.52%. The expense ratio is 0.26%.

Smallcap Value:

IWN has a P/E of 17 and an earning yield of 1.59%. The expense ratio is 0.25%
VBR has a P/E of 14.66 and an earning yield of 1.93%. The expense ratio is 0.12%.

Smallcap Blend:

VB has a P/E of 16.62 and an earning yield of 1.23%. The expense ratio is 0.1%.
IWM has a P/E of 18.83 and an earning yield of 1.07%. The expense ratio is 0.2%.

Smallcap Growth:

VBK has a P/E of 19.67 and an earning yield of 0.41%. The expense ratio is 0.12%.
IWO has a P/E of 21.56 and an earning yield of 0.32%. The expense ratio is 0.25%.

International ETFs:

Of the international ETFs, the interesting ones are noted below:

EEM has a P/E of 14.84 and an earning yield of 1.38%. The expense ratio is 0.77%.
VWO has a P/E of 12.62 and an earning yield of 1.75%. The expense ratio is 0.3%.

EFV has a P/E of 13.25 and an earning yield of 1.67%. The expense ratio is 0.4%.

Looking at all the asset classes, it is clear that large value, large international value, the emerging market ETFs offer the best deals for the new year.

Saturday, January 06, 2007

Infosys (INFY) Analysis

We looked at Infosys almost a year back. Since then, the stock has gained about 50% and has been added to the Nasdaq 100. Let us look at Infosys now and see how things look like for the next year.

Infosys (INFY) is a Indian multinational specializing in software services and off shoring. It is a top Indian company with a market cap of 30 billion. In this segment, we will look at the company and its financials. The overview of the company is as follows:

Infosys Technologies Limited (Infosys) has branches in China, Australia as well as in the U.S. The company provides services for every aspect of software development lifecycle from design and implementation as well as maintenance.

The revenue mix for Infosys for the first six months of 2006 is as follows. US contributed 64% to the revenues, Europe contributed 26% and India contributed 1.6%. Rest of the world contributed 8.7% to the revenue mix. This compares to 2005 mix of 64.6% for US, Europe 23.6%, India 1.9%, rest of the world 9%.

Infosys's net income increased 43% year over year and the share price has jumped by more than 50%. Our estimate of the revenue growth has been soundly been trounced - the strong revenue growth shows the continued strength in the outsourcing business.

The Infosys stock price has grown strongly on the back of strong Indian equity market. The stock price is a bit rich for ones taste at the moment and one can expect more sedate returns from the stock in 2007.

Monday, January 01, 2007

Domestic vs International large value funds

Happy new year to all the readers of this blog. We looked in detail the different investment segments and their valuation in a series of articles in December. In this article, we will compare and contrast the domestic and international value funds to see which one is a better bet for the current year.

Primarily, we will look at VTV, the vanguard large cap value fund and EFV, the iShares MSCI EAFE value fund.

The top ten holdings in VTV are

XOM - Exon Mobil Corp has a P/E of 12
GE - General Electric Company has a P/E of 22
C - Citigroup Inc has a P/E of 11.4
BAC - Bank of America has a P/E of 12.2
PSE - Pfizer Inc has a P/E of 14.8
MO - Altria Group has a P/E of 12
JPM - JP Morgan and Chase has a P/E of 13.6
CVX - Chevron has a P/E of 9.6
AIG - American International Group has a P/E of 17.11
T - AT&T has a P/E of 19.4

The top holdings in EFV are:

HBC - HSBC Holdings PLC. The analysts seem to say there is some upside to this stock still.
TM - Toyota Motor Corp has a P/E of 15 and a market cap of 203 billionNestle
SA - no data is available.
VOD - Vodafone Group PLC has a market cap of 162 billion
RDS-A - Royal Dutch Shell PLC-Class A is selling for a P/E of about 10
Royal Bank of Scotland Group PLC - no good data available
STD, Banco Santander Central Hispano SA has a P/E of 12 and market cap of 116.5 billion
RDS-B - Royal Dutch Shell PLC-Class B is also selling for a P/E of about 10 and market cap of 230 billion
BNP Paribas - no good data available
BCS, Barclays PLC has a P/E of 13 and a market cap of 92 billion.

On doing a stock by stock comparison, the US equities inVTV seem a lot better with better ROE when compared to their EFV counterparts. The US equities also have lower P/E ratios and better earning growth prospects because of their better return on equity.

Interestingly enough, the US companies derive a good percentage of their revenues outside the US. So a weakening dollar should translate to better than expected earnings. The EFV stocks should benefit more from a weakening dollar if majority of their business is outside the US.

The comparison between these two in the past three months can be found below:
three month chart

The difference is starker when looking at the results in the last one year:
one year chart

Overall, the large value segment still looks attractive. Buying this asset class during dips in value should prove to be a good investment strategy for 2007.