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A company may have a big brand name, a long history, and a solid dividend but remain unsuitable for Intelligent Investors. Benjamin Graham taught investors to analyze the company's financial statements to determine an intrinsic value for the company, then compare the price to the value. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another investment opportunity. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Johnson & Johnson fares in the ModernGraham valuation model.

Defensive Investor - Must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least one-third over the last 10 years using three-year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - Must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $91.11
MG Value $39.99
MG Opinion Overvalued
Value Based on 3% Growth $61.79
Value Based on 0% Growth $36.22
Market Implied Growth Rate 6.44%
NCAV $4.78
PEmg 21.38
Current Ratio 2.20
PB Ratio 2.86

Balance Sheet - 12/29/2013

Current Assets $56,407,000,000
Current Liabilities $25,675,000,000
Total Debt $13,328,000,000
Total Assets $132,683,000,000
Intangible Assets $50,745,000,000
Total Liabilities $42,930,000,000
Outstanding Shares 2,820,630,000

Earnings Per Share

2013 $4.81
2012 $3.86
2011 $3.49
2010 $4.78
2009 $4.40
2008 $4.57
2007 $3.63
2006 $3.73
2005 $3.46
2004 $2.84
2003 $2.40
2002 $2.16

Earnings Per Share - ModernGraham

2013 $4.26
2012 $4.06
2011 $4.17
2010 $4.41
2009 $4.14
2008 $3.89

Dividend History

Conclusion:

Johnson & Johnson is a perennial favorite among many investors because of its solid operating history and relative stability. However, it is not suitable for Defensive Investors because of the lack of sufficient earnings growth over the 10-year historical period and the high PEmg and PB ratios. It does pass the tests for the Enterprising Investor so it remains suitable for that investor type. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods, should feel comfortable proceeding with further research including a review of Five Undervalued Companies for the Enterprising Investor. As for a valuation, the company has grown its EPSmg (normalized earnings) only from $4.14 in 2009 to $4.26 for 2013. This level of growth is insufficient to support the market's implied estimate for earnings growth of 6.44%; a more appropriate estimate may be in the 1-2% range. The ModernGraham valuation model returns an estimate of intrinsic value that is below the market price, and the company appears to be overvalued presently.

Disclaimer: The author did not hold a position in Johnson & Johnson Company at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Johnson & Johnson