Benjamin Clark and Jonathon Ritchie submit: Our company-of-the-week this week is Johnson & Johnson (JNJ), a manufacturer of a wide range of products in the healthcare field. As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review. We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.
Business & Management Review:
1. Is the business simple and understandable?
Over the years, their products and research methods have become more sophisticated as technology has improved, but their overall business plan has stayed the same. The company is in the business of providing products that help improve quality-of-life from a health- and personal-care standpoint. The company is well diversified across the healthcare industry, but has remained focused on segments related to its overall business plan.
2. Does the business have a consistent operating history?
Johnson & Johnson was founded in 1886, and has been a driving force in developing state-of-the-art healthcare solutions ever since. Dividends have been paid to shareholders every year since 1944, and have increased each year for 44 straight years. Sales have increased each year for 73 years, and the company has experienced double-digit earnings increases for 21 consecutive years.
3. Does the business have favorable long-term prospects?
Customers will always have a need for healthcare products. This persistent need is evident in the company’s low beta of about 0.21. The real question is whether or not the company can continue to grow consistently. We believe it can. In the developed world, average lifespan is increasing, as is the number of overall elderly. In the developing world, the need for healthcare products will increase as cultures become more open to using the products, and economic situations improve enough for consumers to be able to afford the products. These two factors combined lead to favorable long-term prospects for Johnson & Johnson and the rest of the pharmaceuticals and healthcare industry.
4. Is management rational?
In the latest annual report, management addresses the fact that they had informed shareholders in the previous annual report of their intent to purchase Guidant Corporation. However, over the year events changed, causing the acquisition price of Guidant to increase significantly. Management remained rational and focused on the needs of shareholders, and determined that a purchase was no longer in their best interest. Such rational behavior is all-too-often missing in many managers today. Frequently managers become determined that a particular action is best for shareholders, and refuse to re-examine this as time goes by and situations change. Johnson & Johnson’s management clearly was rational in this regard, and can be expected to remain so the future.
5. Is management candid with its shareholders?
Johnson & Johnson has an extensive investor relations page on their website. William Weldon, Chairman and CEO, also provides an in-depth and candid letter to shareholders in the company’s annual reports that is worth mentioning.
6. Does management resist the institutional imperative?
Johnson & Johnson has a history of being an industry-leader, and is often the first to develop a new product or healthcare approach for their customers. Instead of following the institutional imperative and replicating the performance and processes of other managers, Johnson & Johnson management has historically been extremely innovative.
Financial and Value Review:
Johnson & Johnson is suitable for the enterprising investor following Benjamin Graham’s value investing strategy, but not for the defensive investor. The company currently trades at a P/E ratio of 23.09 and price-to-book ratio of 6.29. Other than these two factors, all aspects of the company’s financial situation and our valuation look good.
We believe the company has potential to reach $81/share in the next few years.
JNJ 1-decade Weekly Chart
Neither of us held a position in Johnson & Johnson at the time of publication.