Seeking Alpha
Profile| Send Message| ()  

First Quarter 2013 Results

On April 16, Johnson & Johnson (JNJ) reported 2013 first quarter results announcing sales of $ 17.5 billion for the first quarter, up 8.5% compared to the same quarter 2012. Sales include the impact of Synthes, net of divestiture of DePuy trauma business.

The net earning for the first quarter were $3,5 billion, included after tax special items of approximately $0.6 billion, primarily related to litigation expenses and integration and transaction cost related to the acquisition of Synthes, Inc.. Excluding the impact of this special items the earning for the first quarter were $4.1 billion.

Diluted earning per share for the first quarter were $1.22 and excluding the impact of special items were $1.44.

The company confirmed the full-year 2013 earning guidance of $5.35 - $5.45 per share, excluding the impact of special items.

As shown in the tab. below, the diluted earning per share of the first quarter 2013, were higher then the average estimate and the full-year 2013 earning guidance, match the average estimate by analysts.

(click to enlarge)

The Company in short
Johnson & Johnson has been founded in 1886 by three brothers Johnson in New Brunswick, New Jersey, U.S..

Currently Johnson & Johnson has more than 250 companies located in 57 countries around the world.

(click to enlarge)

The company is organized into three business segments: The Consumer segment, The Medical Device and Diagnostic segment, The Pharmaceutical segment.

JNJ is the largest Medical Device and Diagnostic company and the 8 th largest Pharmaceutical company.

(click to enlarge)

In the following, the company will be examined through my model of global analysis.

Macroeconomic Analysis

The Pharmaceutical and Medical Device industries are affected very little by fluctuations of the financial markets.

This characteristic makes the industrial sector rather stable during periods of economic crisis, but also unresponsive during periods of economic recovery.

Governmental health care policies could affect the markets, particularly in Asia and Africa, we will see a considerable increase of health services, both public and private, but it will be a long process that will take years to develop.

Let's take a look at the pharmaceutical industry as a whole, we see that the performance of the last year (+ 21%) and that of the last month (+ 3.9%) are quite good and at the top of the ranking of sectors.

(click to enlarge)

(click to enlarge)

Fundamental Analysis

With regard to performing fundamental analysis, the balance sheets over the latest three years have been considered.

From 2010 to 2012 turnover increased by 9.15% while the Gross Operating Margin rose from 19,466 to 19,535 million USD with a variation of EBITDA Margin equal to -2.55 points.

The Operating Profit grew by 3.98% to 15,869 million USD and net income decreased of 18.61%.

The profitability indicators show a decrease in ROI of 9.68 points to 26.49% and a decrease in ROE of 7.35 points to 16.22%.

From the balance sheets point of view there was an increase in the Debt to Equity Ratio, which went from -0.19 to -0.08, the result of a net equity of 64,826 million USD, and a net debt of -4,924 million USD.

Let's take a look at the growth, the following tables show that the consensus forecasts for the current year growth of + 6.10% . In the past five years there has been a growth of 3.49%

(click to enlarge)

Based on ten years of prospective balance sheets as well as those from the previous three years, the Fair Value was calculated using the Discounted Cash Flow method and the result was verified using the Economic Value Added approach.

The prospective balance sheets were drawn up based on the following assumptions:

  • Revenue growth from 6% to 3%

  • EBITDA margin up slightly from 29.00% to 30.00%

  • Declining ROI from 58.23% to 43%

  • Cost of debt steady 1%

  • Tax rate at 23.50%

Fundamental analysis, as described, calculates a Fair Value of $90 per share, which, when compared with the current price of around $ 83.0 , indicates that JNJ has a theoretical potential for growth of over 8%.

We can estimate how the value of the security would change if our assumptions were optimistic. We focus on two of the most important financial parameters: the revenue and EBITA Margin.

We assumed a revenue growth from 6% to 3% and an EBITDA margin from 29% to 30%; now we want to calculate how the Fair Value would change if revenue and the EBITDA margin decreased or increased by 05% or 1%, compared to the values ​​assumed for each year.

(click to enlarge)

Based on the calculation, the best case scenario indicates a rise in the Fair Value to $102, but at worst it would drop to $78.52, lower than the current price..

Risk Analysis

A number of risk factors have been checked and, among the main ones, the ability of the price to react to market changes as well as price volatility, have been considered.

The results are reassuring as JNJ has a beta = 0.49 and its monthly volatility is around 0.8% on average over five years.

However, looking at risk in greater depth, there is a very important element to consider: the indebtedness of the group, which is negative ( Debt/Equity = -0.0760 )

Finally, the analysis of the risk of JNJ is summarized in the indicator BR#risk = 26.67 (range 0 to 100) that shows a very low risk.

Dividends

The dividend of the group has always been a strong point for investors who can rely on a fixed annual income, which is currently around 2.40%, and has increased for 50 consecutive years. The low interest rates make the dividend of JNJ quite attractive as it is higher than the yield on a government bond also long-term. In the current situation is therefore considered a good dividend that attracts investors. However, the risk of higher inflation in the future may necessitate an increase in interest rates that may approach or exceed the dividend yield of JNJ. When this event will occur would lead to lower investors attention if JNJ will not raise dividends at levels higher than the long term bond yields.

Technical Analysis

Let's take a look at the technical analysis evaluating JNJ from the point of view of price and volumes considering different time frames to get a picture of short, medium and long term.

The trend is positive for all time frames considered. After the March 2009 low, the price is going up and from May of last year is undergoing acceleration.

In the short run, after reached a maximum at $ 82.95 on April 3, it pulled back to a relative minimum of 80.3 on April 8. The previous high was then hit again last April 11. A good entry point could be the breakout of the double maximum.

(click to enlarge)

Conclusion

JNJ has a Fair Value not so much higher than the current price. Its activity is little subject to financial market changes and has a low risk degree. The dividend is good and slightly higher than the interest paid by long-term government bonds. The prices have gone up a lot and no sign to retrace. All things considered, who has the security in the portfolio, can continue to maintain it and benefit from future gains and dividends. Buying at current prices must be done very carefully because it is not very far from the Fair Value and the prices ran a lot lately. In any case, should be monitored closely not only the prices, but also inflation and the consequent decisions regarding future dividends.

Source: Johnson & Johnson Has A Good Fair Value, But It's Not So Far From The Current Price