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Author: yttire Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8825  
Subject: Johnson and Johnson JNJ Date: 11/11/2008 6:25 AM
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Recommendations: 29
Yield: 3.1%
Revenue curve: great
Yield/Free cash flow: 0.38 nice (but NOK is better)
10 year dilution: 1.04 (4%)
4 year dividend change: 0.28-0.46
4 year dividend % growth: 13%
backwards 10 year revenue growth: 10% (nearly supports dividend growth)
forwards 10 year projected yield: 8.04% (bounded by revenue growth)
Asset/liability: 80,950/37,635
Price (52wk range): $60.01 ($72.72-$52.06)

I personally only find two companies which seem strongly compelling- JNJ and MCD. I am sure there are others but I don't know what they are. (KMP I like but I am worried about politics and debt on that)


JNJ has a beautiful revenue curve:
http://quicktake.morningstar.com/StockNet/Income10.aspx?Coun...

I suspect a decent part of this is due to acquisitions, and not completely organic, and indeed if we look at 10 year cash flows we see a healthy amount of Capex which averages 1/4 of free cash flow. This is controlled; it means they should not be leveraging themselves too far but also one must accept they are buying up growth to some degree.

If we look at assets to liabilities we have total assets of 80,954 against liabilities of 41,990. This is normally a fine ratio, but going forwards if capital gets harder to borrow this may not be as easy to refinance. I would be curious to hear others thoughts on how this will affect companies when bond rates rise.

Short term liabilities come to 22,730 versus a free cash flow of 12,190 so it seems like they could fund short term shortfalls in the bond markets through cash. The stock price is not taking as bad as a drubbing in the equity market so they could increase their float as well. (Personally, I would like to see companies in this situation increasing their float to reduce their bond exposure).

In the bond market though presumably JNJ should decently as well since it has such a strong brand and reputation. However, I would prefer the same company with a smaller set of liabilities obviously. The overarching theme of this collapse is that taking on excessive debt is bad for oneself. JNJ's debt is NOT excessive, but it is there.

Business segments:

Consumer:The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products.

Pharmaceutical: The Pharmaceutical segment includes products in the following therapeutic areas: anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology and virology.

Medical devices and diagnostics: These products include Cordis’ circulatory disease management products; DePuy’s orthopaedic joint reconstruction and spinal care products; Ethicon’s wound care and women’s health products; Ethicon Endo-Surgery’s minimally invasive surgical products...


They say on seasonality: Worldwide sales do not reflect any significant degree of seasonality; however, spending has been heavier in the fourth quarter of each year than in other quarters. This reflects increased spending decisions, principally for advertising and research and development activity.

Their 10Q is dated 2008-11-04

If we look at sales from year to year in different segments we have:

Consumer - 25% of total sales:
US - up 11.2% (50% of consumer sales)
International - up 14.7% (60% of consumer sales)

Pharmaceutical - 37.5% of total sales:
US - down 6% (60% of pharma sales)
International - up 10.3% (40 of pharma sales)

Medical diagnostic 37.5% of total sales:
US - up 3.1% (45% of medical sales)
International - up 14.3 % (55% of medical sales)

So you can see the recession as of the end of September has not impacted sales much at all (US pharma sales are down)

They mention their pension obligation as:

For the fiscal nine months ended September 28, 2008, the Company contributed $21 million and $17 million to its U.S. and international retirement plans, respectively. The Company is not required to fund the U.S. retirement plans due to minimum statutory funding requirements for its U.S. retirement plans in 2008.

Presumably this will be underfunded this year and require some more injection of cash.

The company is involved in a number of lawsuits with regards to edamages against patients and against rival companies on patent litigation. There are roughly 8 large lawsuits which have yet to come to trial.

JNJ owns derivative instruments to hedge against currency exchange rates changing with "fair value" liabilities at 1,600 (million).

If you had bought this stock in 98 at 45 it is now at 60 reflecting a 30% growth over this period in stock valuation. This is roughly 3% a year. In 2002 the price dropped to just above 40, and in 2000 dropped to just above 35. The revenue growth in that same time period goes from 23,657 to 64,552 (10.5% yearly growth). Clearly its future growth is being discounted. If it could maintain its 10.5% growth this would be a screaming buy in my mind (but I expect it will slow somewhat honestly)

It has tracked closely (linearly not % wise) with the S&P 500 in the recent drops which implies that if the overall market drops more, then better entry price points may be available. (If the market shoots up, JNJ will undoubtably shoot up as well too). It has a current P/E of 13.6. Recession P/E's often hover around 9, implying a possible 30% drop from here. A depression P/E of around 6 could offer a price point 50% off from here.

My Analysis:

JNJ looks like a good company with some real risks against it but surmountable ones. Being in healthcare it is well position for a recession, but of course could take some lumps. If the bond market completely falls apart it may have to take on expensive debt at some point in the future which would be the main knock against it and could eventually threaten dividends. (There are few growth dividend companies that do not have debt though because that is how they are financing their growth in the first place). There are potentially large lawsuits against it, these mainly in my mind could offer attractive entry prices on buying rather than threats to the stability of the company, but only one is coming up in March of next year the others do not have trial dates.

At a little over a 3% yield this seems like a good investment at this price point, but I am hoping for a better entry point in coming months. My expectation is that the dividend growth may slow in the upcoming recessionary environment, but still have a dividend as long as bond financing is available. A slowed dividend and earning stream may knock this stock to much lower levels making a great entry point (after the recession wears off I would expect earnings and revenue to start growing again).

I think this is a solid stock to own at this price point, and even if it takes a beating and drops 50% you would be looking at a 6% yield at that point which would be nice. Of course, it would be even nicer to buy that yield directly, but for anyone who wants to be in the market at this point I think JNJ is a good pick.

If I were comparing this against other similar companies, I'd like to look at the cash flow relative to short and long term liabilities. If you read through the financial statements read the 10Q first, it is better than the 10K.

I do have some reservations on this stock with the new administrations response to health care. If for example new legislation comes down the line which crimps pharmaceutical profits, we are looking at a third of the revenue getting hit. Still, I expect this company will do decently even with a headwind because of its diversification.
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