JNJ Still Solid - Buffett or No Buffett

Berkshire Hathaway’s (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

Quick Valuation

• 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%

Johnson & Johnson still remains a solid company. Whether Buffett himself or his subsidiaries sold it or not, the business continues to pump out cash. Just the way I like it.

Disclosure: No position at time of writing.

Comments

[livesinhiscar:]

>>We think that people will still maintain their baby powder, band aids and shampoos

Just remember that the consumer business is only 25% of JNJ's business.
They have a 40% exposure to pharmaceuticals which is a business like PFE, MRK, etc, etc which comes with baggage like patent expirations and class action lawsuits.

Mar 02 08:39 AM

[Mad Hedge F...:]

VVc xs “If you have been playing poker for a half an hour, and you don’t know who the patsy is, it’s you,” said Warren Buffet.

Mar 02 09:21 AM

[Jersey Joe:]

Maybe the thought that JNJ wasn't interested in playing the GE patsy has sum merit. I think we need to keep in mind that Warren is not interested in the "economy", Warren is concerned with what is good for Warren and screw the rest of us.

Mar 02 10:35 AM

[FGH:]

Jae Jun offers a lucid insight into JNJ here. Following whales like Kirkorian, Ichan, Pickens and Buffet, et al, has been no help during these times and even disasterous for those who drank their kool-aid. Remember only 12 months ago when Ichan was hot to buyout now bankrupt WCI at $21...great idea! How about Pickens' oil call...and his wind farm blather. Contarian indicators in retrospect. So Buffet folded out of JNJ equity in favor of GE debt...maybe he's the patsy.

Mar 02 04:29 PM

[SteveTheHawk:]

My major purchase of JNJ was at $56. In that it represents a decent chunk of my portfolio, it would not be prudent to buy more and make it overweight. I am however holding out for $45. If it hits that mark, I may very well decide to ignore prudent and buy some more.

Mar 02 06:35 PM

[Big K:]

The market is now selling indiscrimantly. This for sure means a market bottom soon. The upcoming capitulation plunge may put JNJ into the 30s. When JNJ gets to 30-40, I recommend buying. The dividend will be 5-6% at that level, quite fair. This stock will be back in the 50-60 range by next year, and will raise it's divendend a couple of times in that period.

Mar 03 01:16 AM