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Johnson & Johnson - Large-cap Growth at an Attractive Price

July 25, 2012 | About:
About Johnson & Johnson (NYSE:JNJ): Directly from their website

“Caring for the world, one person at a time... inspires and unites the people of Johnson & Johnson. We embrace research and science - bringing innovative ideas, products and services to advance the health and well-being of people. Our approximately 128,000 employees at more than 250 Johnson & Johnson operating companies work with partners in health care to touch the lives of over a billion people every day, throughout the world.”

Earnings Determine Market Price: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Johnson & Johnson: Historical Earnings, Price, Dividends and Normal PE Since 1998


Performance Table Johnson & Johnson

The associated performance results with the earnings and price-correlated graph validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 5% capital appreciation, long-term shareholders of Johnson & Johnson, assuming an initial investment of $100,000, would have received an additional $53,433.60 in dividends that increased their total return from 5% to 6.7% per annum versus 3.6% in the S&P 500.


The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 1998.


A further indication of valuation can be seen by examining a company’s current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Johnson & Johnson is 2.85 which is historically low.


Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1. The rate of change (growth rate) of the company’s earnings

2. The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 26 leading analysts reporting to Capital IQ forecast Johnson & Johnson’s long-term earnings growth at 6.1%. Johnson & Johnson has low long-term debt at 19% of capital. Johnson & Johnson is currently trading at a P/E of 13.3, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Johnson & Johnson’s True Worth™ valuation would be $103.79 at the end of 2017, which would be an 11.3% annual rate of return from the current price.


Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Johnson & Johnson to an equal investment in 10 year Treasury bonds, illustrates that Johnson & Johnson’s expected earnings would be 7.3 times that of the 10 Year T-Bond Interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.


Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure: Long JNJ at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

About the author:

FAST Graphs
F.A.S.T. Graphs™ is a powerful research tool providing "essential fundamentals at a glance" on over 17,000 symbols. F.A.S.T. Graphs™ empowers the user to research stocks deeper and faster by allowing them to exploit the undeniable relationship and functional correlation between long-term earnings growth and market price. Warren Buffett, the greatest capital allocator of all time, said; "there are only two things that investor needs to know; how to value a company and how to think about stock prices." With the F.A.S.T. Graphs™ at their disposal, users are able to perform both of these critical tasks... FAST.

F.A.S.T. is an acronym for Fundamentals Analyzer Software Tool that takes all the hours of manual graphing of business fundamentals and reduces it to seconds, giving you critical information in an instant. With one glance you know a lot about the business you are graphing and its past, present and future value. F.A.S.T. Graphs™ should be the first step in every research project. Each graph is worth 1,000 words in describing a company's growth, consistency and valuation.

Visit FAST Graphs's Website

Rating: 3.2/5 (18 votes)


Hardcorevalue - 5 years ago    Report SPAM
FAST Graphs
FAST Graphs - 5 years ago    Report SPAM

I am sorry you found this Fast Graph analysis confusing. Let me try to clear things up. FAST Graphs present “essential fundamentals at a glance” organized for your convenience and efficiency. Simply stated, they display a company’s historical operating results (earnings) at a calculated fair value. The orange line plots earnings and represents a fair value PE of 15 on JNJ.

The blue line shows a normal PE that the market has applied. The light blue shaded area shows dividends paid out of earnings, pretty simple.

Here is an interpretation of the historical earnings and price correlated graph. Clearly the market has historically priced JNJ at a premium until 2007ish. Since then, the market has valued JNJ at a much lower valuation. The price is now below the orange line.

Regarding the forecasting graphs, they default to consensus analyst forecasts. They offer a precise forecast ($ amt.) for this fiscal year and next, followed by a simple forward compounding at the analysts’ projected 5 year estimated growth rate.

To summarize, FAST Graphs provide the following:

· 1. FAST Graphs provide a historical review and instantaneous perspective of how well the business behind the stock has historically performed.

· 2. FAST Graphs provide an instantaneous perspective of how the market has historically capitalized or priced the company's operating results or business performance.

· 3. FAST Graphs provide a consensus estimate of leading analysts’ near-term earnings expectations for a company's current fiscal year and next fiscal year followed by a 5 year consensus estimate.

· 4. FAST Graphs provide the opportunity to override, and therefore, input the user's own estimates or expectations of the company's future prospects.

I designed FAST Graphs report fundamental information and organize it into a useful analytical manner. It’s left up to the viewer to interpret the information.

I hope this helps clarify things for you,

Chuck Carnevale


FAST Graphs, Inc

Jean-Francois Nobert
Jean-Francois Nobert - 5 years ago    Report SPAM

Good article, your graph are really a great start to seek deeper to find good value. I have some question about JNJ.I wanted to analyses it deeper for a while does anyone take a look at it? Why the margin are decreasing? Who are the competitors? Is there sign that margin come back to is normal level, is it ok this way? Is the stock at the current price worth the risk even at attractive price for the risk it bring?

Warren Buffet on JNJ is not bullish this doesn't mean it's a bad investment but as far as i'm concern when buffet said he would put it on is selling list I’m worry a little....

Source interview on CNBC: "He believes too many mistakes have been made at the recall-prone company and while it is still attractive at its current price, he would sell some shares if he needed to raise capital. It's "obviously messed up in a lot of ways in the last few years."


Kfh227 - 5 years ago    Report SPAM
RE Buffett:

He and Munger think alike. You don't worry about what you paid for JNJ and where you think it will be in 5 years and hold regardless. If you find a better investment, you sell JNJ and buy it. I don't see the issue here. he's not saying JNJ is bad enough that he'd sell it. he simply said that he would consider using it to reallocate capital if he had to.

FWIW: Some of these recalls have been going on for years. JNJ would have been better off buildign a new manufacturing facility from scratch at this point.

Please leave your comment:

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