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Cisco Disappoints, Johnson & Johnson Stays Flat and Yum! Brand Delights. Will the Experience Continue?

September 22, 2010 | About:
When one buys a stock, there are three ways that one can profit from the investment: dividend, growing earning, and growing valuation.

Morningstar’s Pat Dorsey uses Cisco (CSCO), Johnson & Johnson (JNJ), and Yum! Brand (YUM) to illustrate the simple truth.



Going forward, however, investors in these three stocks may have different experiences from what they have had in the past decade:


1. CSCO is traded at free cash yield of about 10%, based on the numbers that Dorsey used and it will start to pay a dividend first time ever;

2. Johnson & Johnson has a P/E ratio of 12 and is still growing its earning. How much lower the P/E ratio can go for a company that has grown top line per share 10% each year and EPS 12% each year during the past 10 years? I don’t have a crystal ball, but I know there is a bottom to each well;

3. I am not sure about how Yum! Brand will go from here. As Dorsey said, it is traded at 20 times earning, a bit high for my taste. On the other hand, the company has experienced good growth in the past decade and I don’t see reasons why it cannot carry on. So the high valuation may be justifiable.








About the author:

guruek
Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th-century Franciscan friar, William of Ockham. We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Please visit www.ockhamresearch.com for more information.

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