Berkshire Hathaway’s (NYSE:BRK.A) 13-F, revealing a big sell-off of JNJ, created a huge wave of news about whether Buffett has gone sour on the business. With everyone offering tremendous terms to Buffett in order to borrow from his horde of cash, I wouldn’t be surprised if he is getting better deals from these American icons than what JNJ is offering.
Rather than getting swamped with the noise, analyzing the numbers itself reveals that JNJ is in fine condition.
I think it is safe to say that JNJ requires no introduction. Here are some points to note regarding JNJ from the following PDF analysis.
Quick Look at the Financial Statements
- Gross profit maintained at 70%
- SG&A steady at 33%
- Slight reduction in R&D
- Larger than usual Other expense (requires digging into footnotes)
- Decline in net margin to 17.3% which is around the same level during the previous recession
- Steadily increasing accounts receivables, inventory and other assets
- Doubled intangibles in 2006
- Tripled long term debt from 2006 but still capable of paying it off easily
- Other long term liabilities doubled
- FCF growth maintained more than 10 years
- Very good, strong and consistent numbers but the increase in debt should be looked at
- Bottom line margins declining. JNJ is still subject to a recessionary environment. We think that people will still maintain their baby powder, band aids and shampoos, but when it gets tough, most resort to the cheaper and generic brands
- DCF values JNJ at $71 which is the peak price from 2008
- Plenty of FCF to cover debt
- Ben Graham formula values JNJ at $108 which is overly optimistic
- JNJ has always been trading close to its intrinsic value but the recent dip is the biggest stray from the intrinsic line to date
- Compared to its competitors, JNJ is not trading at a premium. A very respectable PE of 12
- Highest earnings yield in a long time of 13%
Disclosure: No position at time of writing.