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.

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