Sunday, February 22, 2009

Johnson & Johnson Rundown

Berkshire Hathaway's 13-F revealing a big sell off of JNJ, has created a huge wave of news about whether Buffett has gone sour on the business. Without hearing from the man himself, we will never know. With everyone offering tremendous terms to Buffett in order to borrow from his hoarde of cash, I wouldn't be surprised if he is getting better deals from these American icons than what JNJ is offering.

Rather than getting swamped with the noise, analysing the numbers itself reveals that JNJ is in fine condition.

I think it is safe to say that JNJ requires no introduction. Here are some points to note regarding JNJ from the following PDF analysis.

Quick Look at the Financial Statements

  • Gross profit maintained at 70%
  • SG&A steady at 33%
  • Slight reduction in R&D
  • Larger than usual Other expense (requires digging into footnotes)
  • Decline in net margin to 17.3% which is around the same level during the previous recession
  • Steadily increasing accounts receivables, inventory and other assets
  • Doubled intangibles in 2006
  • Tripled long term debt from 2006 but still capable of paying it off easily
  • Other long term liabilities doubled
  • FCF growth maintained more than 10 years

Quick Valuation

  • Very good, strong and consistent numbers but the increase in debt should be looked at
  • Bottom line margins declining. JNJ is still subject to a recessionary environment. We think that people will still maintain their baby powder, band aids and shampoos, but when it gets tough, most resort to the cheaper and generic brands.
  • DCF values JNJ at $71 which is the peak price from 2008
  • Plenty of FCF to cover debt
  • Ben Graham formula values JNJ at $108 which is overly optimistic
  • JNJ has always been trading close to its intrinsic value but the recent dip is the biggest stray from the intrinsic line to date
  • Compared to its competitors, JNJ is not trading at a premium. A very respectable PE of 12.
  • Highest earnings yield in a long time of 13%

Johnson & Johnson still remains to be a solid company. Whether Buffett himself or his subsidiaries sold it or not, the business continues to pump out cash. Just the way I like it.Download the PDF.

This article was written by Old School Value. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

2 comments:

  1. Jae: Excellent analysis! Thanks for sharing it with DIV-Net!

    Best Wishes,
    D4L

    ReplyDelete
  2. It brings up an interesting question of why Buffett would sell JNJ and we won't know unless he tells anyone. JNJ is a core holding in my US portfolio and regardless of who is buying or selling the stock I still like its long-term fundamentals, business model and profitability.

    One theory for the JNJ sale might be the current price Buffett has been receiving for investments in bonds and senior capital. When you can receive 15% on a bond and expose yourself far less to the uncertainty of the equity market Buffett may just be looking for a place to pull excess capital from to fund these purchases. As much as I like JNJ, I might do the same if I knew I could secure 15% on quality debt for a fixed period of time with very favourable terms.

    ReplyDelete

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