Johnson & Johnson (JNJ, Financial) has shown a 1.58% daily gain and a 3-month gain of 0.62%, with an Earnings Per Share (EPS) (EPS) of 4.94. This sparks a pertinent question: is Johnson & Johnson (JNJ) modestly undervalued? Our valuation analysis aims to answer this question. Read on for an in-depth exploration of Johnson & Johnson's intrinsic value.
Company Introduction
Johnson & Johnson, the world's largest and most diverse healthcare firm, operates through three divisions: pharmaceutical, medical devices and diagnostics, and consumer. The drug and device groups contribute close to 80% of sales and drive the majority of the firm's cash flows. The consumer group, focusing on baby care, beauty, oral care, over-the-counter drugs, and women's health, is set to be divested in 2023 under the new name Kenvue. Geographically, just over half of the total revenue is generated in the United States.
Comparing Johnson & Johnson's stock price of $160.5 with its fair value (GF Value) of $179.74, the stock appears to be modestly undervalued. Here's a snapshot of the company's income breakdown:
Understanding the GF Value
The GF Value is a proprietary measure that estimates a stock's intrinsic value, considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded.
According to our valuation method, Johnson & Johnson's stock appears to be modestly undervalued. If the stock price is significantly above the GF Value Line, it may be overvalued, indicating poor future returns. Conversely, if the stock price is significantly below the GF Value Line, it may be undervalued, suggesting higher future returns. Considering Johnson & Johnson's current price of $160.5 per share, the stock seems to be modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Assessing Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Johnson & Johnson has a cash-to-debt ratio of 0.63, which ranks worse than 56.1% of 1050 companies in the Drug Manufacturers industry. Based on this, GuruFocus ranks Johnson & Johnson's financial strength as 7 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Johnson & Johnson has been profitable for 10 of the past 10 years. Over the past twelve months, the company had a revenue of $97.80 billion and Earnings Per Share (EPS) of $4.94. Its operating margin is 25.5%, which ranks better than 91.19% of 1033 companies in the Drug Manufacturers industry. Overall, Johnson & Johnson's profitability is ranked 9 out of 10, indicating strong profitability.
Growth is probably one of the most important factors in the valuation of a company. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Johnson & Johnson's 3-year average revenue growth rate is worse than 52.74% of 912 companies in the Drug Manufacturers industry. Johnson & Johnson's 3-year average EBITDA growth rate is 5.8%, which ranks worse than 57.78% of 881 companies in the Drug Manufacturers industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Johnson & Johnson's ROIC is 14.82, and its WACC is 6.05.
Conclusion
In conclusion, Johnson & Johnson (JNJ, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks worse than 57.78% of 881 companies in the Drug Manufacturers industry. To learn more about Johnson & Johnson stock, check out its 30-Year Financials here.
To find out high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
