Is Johnson & Johnson undervalued based on future cash flows and its price relative to the stock market?
Value is all about what a company is worth versus what price it is available for. If you went into a grocery store and all the bananas were on sale at half price, they could be considered undervalued.
INTRINSIC VALUE BASED ON FUTURE CASH FLOWS
Here we compare the current
share price of Johnson & Johnson to its discounted cash flow value.
The discounted cash flow value is simply looking at what the company is worth today, based on estimates of how much money it is expected to make in the future.
How is this discounted cash flow calculated?
- The current share price of Johnson & Johnson is above its future cash flow value.
Often investors are willing to pay a premium for a company that has a high dividend or the potential for future growth.
We assess Johnson & Johnson's value by looking at:
- Is the discounted cash flow value less than 20%, or 40% of the share price? (2 checks) (Click here or on bar chart for details of DCF calculation.)
- Is the PE ratio less than the market average, and/ or less than the Pharma and Biotech industry average (and greater than 0)? (2 checks)
- Is the PEG ratio within a reasonable range (0 to 1)? (1 check)
- Is the PB ratio less than the Pharma and Biotech industry average (and greater than 0)? (1 check)
Johnson & Johnson has a total score of 3/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations including PE and PEG Ratio.
Note 2: PEG ratio is based on analysts EPS growth expectations in 1 year (9.26%).
Full details on the Value part of the Simply Wall St company analysis model.
Discounted cash flow (Free cash flow to Equity)
The calculations below outline how an intrinsic value for Johnson & Johnson is arrived at by discounting future cash flows to their present value. We use analyst's estimates of cash flows going forward 5 years.
5 year cash flow forecast
See our documentation to learn about this calculation.
|Levered FCF (USD, Millions)
Discounted (@ 8.7%)
Present value of next 5 years cash flows:
Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)
Terminal Value = $21,058 × (1 + 2.3%) ÷ (8.65% – 2.3%)
Terminal value based on the Perpetuity Method where growth (g) = 2.3%:
Present value of terminal value:
Equity Value (Total value) = Present value of next 5 years cash flows + terminal value
Value = Total value / Shares Outstanding ($306,582 / 2,694)
Value per share:
Current discount (share price of $126.92): -12%
Estimate of Discount Rate
The discount rate, or required rate of return, is estimated by calculating the Cost of Equity.
Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)
Discount rate = 8.65% = 2.33% + (0.824 * 7.67%)
Estimate of Bottom Up Beta
The Levered Beta is the Unlevered Beta adjusted for financial leverage. It is limited to 0.8 to 2.0 (practical range for a stable firm).
Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity))
0.824 = 0.772 (1 + (1- 30%) (9.57%))
Levered Beta used in calculation = 0.824
- The risk free rate of 2.33% is from the 10 year government bond rate in US.
- The bottom-up beta is estimated by analysing other companies in the same industry.
- The Equity Risk Premium is calculated by subtracting the risk free rate from the market return premium (10%) (source: Buffet).
- The dividend discount model is automatically used for companies in the following industries: Banks, Insurance, Real Estate Investment Trusts (REITs), Diversified Financial Services and Capital Markets.
How is Johnson & Johnson expected to perform in the next 1 to 3 years based on estimates from 20 analysts?
The future performance of a company is measured in the same way as past performance, by looking at estimated growth and how much profit it is expected to make.
Future estimates come from professional analysts. Just like forecasting the weather, they don’t always get it right!
Expected earnings growth over 3 years.
Future Earnings growth analysis
Is Johnson & Johnson expected to grow at an attractive rate? We look at the 1 year and 3 year growth below.
Are Johnson & Johnson's annual earnings growth expected to exceed 3.4% over the next 3 years?
- After 1 year
- After 3 years
1 & 3 year estimated growth in earnings
Past and Future Earnings per Share
The accuracy of the analysts who estimate the future performance data can be gauged below. We look back 3 years and see if they were any good at predicting what actually occured. We also show the highest and lowest estimates looking forward to see if there is a wide range.
Analysts growth expectations
2 year growth check
Which of the these is expected to increase by over 50% in 2 year's time?
Performance in 3 years
In the same way as past performance we look at the future estimated return (profit) compared to the available funds. We do this looking forward 3 years.
- Johnson & Johnson is expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be above 20%.
Improvement & Relative to industry
- Expected to be less than the Pharma and Biotech industry average.
- A decline in Johnson & Johnson's performance (ROE) is expected over the next 3 years.
Future performance checks
We assess Johnson & Johnson's future performance by looking at:
- Is the growth in earnings expected to beat the low risk savings rate, plus a premium to keep pace with inflation, in 1 year and 3 years? (2 checks)
- Does the average analyst expect Revenue to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Operating Cash Flow to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Net Income (Profit) to increase by 50% or more in 2 years? (1 check)
- Is the Return on Equity in 3 years expected to be over 20%? (1 check)
Some of the above checks will fail if the company is expected to be loss making in the relevant year.
Johnson & Johnson has a total score of 3/6, see the detailed checks below.
Note: If no +3 year data is available, +2.5 year data may be used.
Note 2: We use GAAP per Share in all our calculations.
Full details on the Future part of the Simply Wall St company analysis model.
How has Johnson & Johnson performed over the past 5 years?
The past performance of a company can be measured by how much growth it has experienced and how much profit it makes relative to the funds and assets it has available.
Past earnings growth
Below we compare Johnson & Johnson's growth in the last year to its industry (Pharma and Biotech).
Past Earnings growth analysis
We also check if the company has grown in the past 5 years, and whether it has maintained that growth in the year.
- Johnson & Johnson's earnings growth has not matched the industry average in the past year.
- Johnson & Johnson's 1 year earnings growth exceeds its 5 year annual average (7.8% vs 6.3%).
- Johnson & Johnson has improved earnings in the past 5 years.
Johnson & Johnson's revenue and profit over the past 5 years is shown below, any years where they have experienced a loss will show up in red.
Performance last year
We want to ensure a company is making the most of what it has available. This is done by comparing the return (profit) to a company's available funds, assets and capital.
- Strong return on shareholders funds (ROE) last year.
- Johnson & Johnson performed above the Pharma and Biotech industry average based on return on assets (ROA) last year.
- Performance based on revenue producing assets (ROCE) is broadly the same over 3 years.
Past performance checks
We assess Johnson & Johnson's performance over the past 5 years by checking for:
- Has earnings per share (EPS) increased in past 5 years? (1 check)
- Has the EPS growth in the last year exceeded that of the Pharma and Biotech industry? (1 check)
- Is the current EPS growth higher than the average annual growth over the past 5 years? (1 check)
- Is the Return on Equity (ROE) higher than 20%? (1 check)
- Is the Return on Assets (ROA) above industry average? (1 check)
- Has the Return on Capital Employed (ROCE) increased from 3 years ago? (1 check)
The above checks will fail if the company has reported a loss in the most recent earnings report. Some checks require at least 3 or 5 years worth of data.
Johnson & Johnson has a total score of 5/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations.
Full details on the Past part of the Simply Wall St company analysis model.
How is Johnson & Johnson's financial health and their level of debt?
A company's financial position is much like your own financial position, it includes everything you own (assets) and owe (liabilities).
The boxes below represent the relative size of what makes up Johnson & Johnson's finances.
The net worth of a company is the difference between its assets and liabilities.
- Johnson & Johnson is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
- Johnson & Johnson's cash and other short term assets cover its long term commitments.
This treemap shows a more detailed breakdown of Johnson & Johnson's finances.
If any of them are yellow this indicates they may be out of proportion and red means they relate to one of the checks below.
Liabilities and shares
The 'shares' portion represents any funds contributed by the owners (shareholders) and any profits.
- Low level of unsold assets
- Total debt is covered by short term assets.
Nearly all companies have debt. Debt in itself isn’t bad, however if the debt is too high, or the company can’t afford to pay the interest on its debts this may have impacts in the future.
The graphic below shows equity (available funds) and debt, we ideally want to see the red area (debt) decreasing.
If there is any debt we look at the companies capability to repay it, and whether the level has increased over the past 5 years.
- The level of debt (47%) compared to net worth is high (greater 40%).
- The level of debt compared to net worth has increased over the past 5 years (33% vs 47% today).
- Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
- Interest on debt is well covered by earnings (58.6x coverage).
Financial health checks
We assess Johnson & Johnson's financial health by checking for:
Full details on the Health part of the Simply Wall St company analysis model.
- Are short term assets greater than short term liabilities? (1 check)
- Are short term assets greater than long term liabilities? (1 check)
- Has the debt to equity ratio increased in the past 5 years? (1 check)
- Is the debt to equity ratio over 40%? (1 check)
- Is the debt covered by short term assets? (1 check)
- Are earnings greater than 5x the interest on debt (if comapany pays interest at all)? (1 check)
Johnson & Johnson has a total score of 4/6, see the detailed checks below.
What is Johnson & Johnson's current dividend yield, its reliability and sustainability?
Dividends are regular cash payments to you from the company, similar to a bank paying you interest on a savings account.
Annual Dividend Income
Current annual income from Johnson & Johnson dividends. Estimated to be 2.81% next year.
If you bought $2,000 of Johnson & Johnson shares you are expected to receive $53 in your first year as a dividend.
Here we look how much dividend is being paid, if any. Is it above what you can get in a savings account?
It is up there with the best dividend paying companies?
- Paying above low risk savings rate. (2.25%)
- Paying below the markets top dividend payers. (3.18%)
Historical dividend yield
It is important to see if the dividend for a company is stable, and not wildly increasing/decreasing each year. This graph shows you the historical rate to count toward your assessment of the stock.
We also check to see if the dividend has increased in the past 10 years.
- Dividends per share have been stable in the past 10 years.
- Dividends per share have increased over the past 10 years.
Current Payout to shareholders
What portion of Johnson & Johnson's earnings are paid to the shareholders as a dividend.
- Dividends paid are covered by net profit (1.9x coverage).
Future Payout to shareholders
- Dividends after 3 years are expected to be well covered by net profit (2.1x coverage).
Income/ dividend checks
We assess Johnson & Johnson's dividend by checking for:
Full details on the Dividends part of the Simply Wall St company analysis model.
- Firstly is the company paying a notable dividend (greater than 0.5%) - if not then the rest of the checks are ignored.
- Current dividend yield, is there one at all, is it higher than the low risk savings rate, and is it above the top 25% of dividend payers? (2 checks)
- Have they paid a dividend for 10 years, and during this period has the dividend been volatile (drop of more than 25%)? (1 check)
- If they have paid a dividend for 10 years has it increased in this time? (1 check)
- How sustainable is the dividend, can Johnson & Johnson afford to pay it from its earnings today and in 3 years (Payout ratio less than 90%)? (2 checks)
Johnson & Johnson has a total score of 5/6, see the detailed checks below.
What is the CEO of Johnson & Johnson's salary, the management and board of directors tenure and is there insider trading?
Management is one of the most important areas of a company. We look at unreasonable CEO compensation, how long the team and board of directors have been around for and insider trading.
Mr. Alex Gorsky has been the Chairman and Chief Executive Officer of Johnson & Johnson since December 28, 2012 and April 26, 2012 respectively. Mr. Gorsky served as the Chief Operating Officer and Head of General Medicines at Novartis Pharmaceuticals Corporation from May 2004 to February 2008. He also served as the Chief Executive Officer of Novartis Pharmaceuticals from 2005 to February 2008 and as its Head of Pharma North America since 2005. He was responsible for North American pharmaceutical operations of NPC which includes both the United States and Canada. He served as Chief Executive of U.S at Novartis Corporation until February 2008. He served as Head of USA Pharmaceutical Business at Novartis AG until April 2008. He served as Worldwide Chairman of Surgical Care Group at Johnson & Johnson since January 1, 2009 until September 2009. He served for 15 years in various sales, marketing and management roles with Janssen Pharmaceutica, a Johnson & Johnson unit. He first joined Johnson & Johnson in 1988. In 2001, he was appointed President of Janssen's U.S. operations/president of Janssen Pharmaceutical Inc. As leader of Janssen's management board, Mr. Gorsky had responsibility for all of its functional areas, including: administration and community affairs; finance; human resources; information management; marketing; medical affairs; public relations; sales and process excellence. He began his pharmaceutical career as a sales representative and held various roles of increasing responsibility in sales, marketing and general management. He also oversaw the launches of Aciphex(R), a proton pump inhibitor for GI disorders and Reminyl(R), a treatment for Alzheimer's disease. Mr. Gorsky left Johnson & Johnson in 2004 to join the Novartis Pharmaceuticals Corporation. He served as Worldwide Chairman of the Surgical Care Group at Johnson & Johnson since 2009 and Worldwide Chairman of the Medical Devices and Diagnostics Group since September 2009. He served as Company Group Chairman of Johnson & Johnson's pharmaceutical business in Europe, the Middle East and Africa since 2003. He served for six years in the U.S. Army, finishing his career with the rank of Captain. During that same time, he earned the Ranger Tab, Airborne Wings and served in Europe, the United States and Panama. His landmark achievements at Janssen include the commercialization of blockbusters Risperdal(R), an atypical anti-psychotic medicine and Duragesic(R) for pain. Mr. Gorsky served as Company Group Chairman of for Ethicon Inc. since 2008. Mr. Gorsky has been a Director of Johnson & Johnson since April 26, 2012. He has been a Director at International Business Machines Corporation since September 1, 2014. He serves on the board of AdvaMed, the U.S. trade association for the medical device and diagnostics industry. He is an Executive Sponsor of two Johnson & Johnson affinity groups, the Women's Leadership Initiative and the Veteran's Leadership Council. He is actively involved in the National Alliance for the Mentally Ill, the National Alliance on Aging, the Philadelphia College of Pharmacy, the Doylestown Hospital Board, the Boy Scouts of America and as a Youth League Coach for Lacrosse. Mr. Gorsky also serves on the boards of the Travis Manion Foundation, the Congressional Medal of Honor Foundation, the National Academy Foundation and the Wharton Board of Overseers. He is a member of the Business Roundtable and The Business Council. A longtime advocate of diversity and inclusion, Mr. Gorsky was named the 2009 Mentor of the Year by the Healthcare Businesswomen's Association. Mr. Gorsky holds a Bachelor's of science degree from the U.S. Military Academy in West Point, N.Y., in 1982. He obtained a Master of Business Administration degree from The Wharton School of the University of Pennsylvania in 1996.
- CEO's compensation has been consistent with company performance over the past year.
- CEO's compensation appears reasonable.
Management Team Tenure
Average tenure of the Johnson & Johnson management team:
- The tenure for the Johnson & Johnson management team is about average.
Chairman and Chief Executive Officer
Chief Financial Officer and Executive Vice President
Chief Scientific Officer and Executive Vice President
Executive Vice President and Worldwide Chairman of Pharmaceuticals
Executive Vice President and Group Worldwide Chairman
Chief Accounting Officer and Controller
Board of Directors Tenure
Average tenure of the Johnson & Johnson board of directors:
- The tenure for the Johnson & Johnson board of directors is about average.
Board of Directors
Chairman and Chief Executive Officer
Recent Insider Trading
- Johnson & Johnson insiders have sold more shares than they have bought in the past 3 months.
Who owns this company?
We assess Johnson & Johnson's management by checking for:
- Is the CEO's compensation unreasonable compared to market cap and profit (greater than 0.5% of the company's profit + 0.03% of market cap)? (1 check)
- Has the CEO's compensation increased more than 20% whilst the EPS is down more then 20%? (1 check)
- Is the average tenure of the management team less than 2 years? (1 check)
- Is the average tenure of the board of directors team less than 3 years? (1 check)
Johnson & Johnson has a total score of 6/6, this is not included on the snowflake, see the detailed checks below.
Note: We use the top 6 management executives and board members in our calculations.
Note 2: Insider trading include any internal stakeholders and these transactions
Full details on the Management part of the Simply Wall St company analysis model.
Johnson & Johnson, together with its subsidiaries, researches and develops, manufactures, and sells various products in the health care field worldwide. It operates through three segments: Consumer, Pharmaceutical, and Medical Devices. The Consumer segment offers baby care products under the JOHNSON’S brand; oral care products under the LISTERINE brand; beauty products under the AVEENO, CLEAN & CLEAR, DABAO, JOHNSON’S Adult, LE PETITE MARSEILLAIS, NEUTROGENA, RoC, and OGX brands; over-the-counter medicines, including acetaminophen products under the TYLENOL brand; cold, flu, and allergy products under the SUDAFED brand; allergy products under the BENADRYL and ZYRTEC brands; ibuprofen products under the MOTRIN IB brand; and acid reflux products under the PEPCID brand. This segment also provides women’s health products, such as sanitary pads under the STAYFREE and CAREFREE brands, and tampons under the o.b. brand; wound care products comprising brand adhesive bandages under the BAND-AID brand and first aid products under the NEOSPORIN brand. The Pharmaceutical segment offers various products in the areas of immunology, infectious diseases and vaccines, neuroscience, oncology, and cardiovascular and metabolic diseases. The Medical Devices segment provides orthopaedic products; general surgery, biosurgical, endomechanical, and energy products; electrophysiology products to treat cardiovascular disease; sterilization and disinfection products to reduce surgical infection; diabetes care products that include blood glucose monitoring and insulin delivery products; and disposable contact lenses. The company markets its products to general public, retail outlets and distributors, wholesalers, hospitals, and health care professionals for prescription use, as well as for use in the professional fields by physicians, nurses, hospitals, eye care professionals, and clinics. Johnson & Johnson was founded in 1885 and is based in New Brunswick, New Jersey.
|Name:||Johnson & Johnson|
|Market Cap:||$341,901 million|
One Johnson & Johnson Plaza, New Brunswick, 08933, United States
Johnson & Johnson employees.
|Sector:||Pharmaceuticals, Biotechnology and Life Sciences|