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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Johnson & Johnson: JNJ Cash Flow Valuation 0 comments
    Jun 25, 2014 7:02 PM | about stocks: JNJ

    Current Price: ~ $106/share
    Yield: ~ 2.56%

    Johnson & Johnson is a holding company, which is engaged in the research and development, manufacture and sale of a range of products in the health care field within its Consumer, Pharmaceutical and Medical Devices, and Diagnostics business segments.

    JOHNSON Children
    Eczema Carousel

    Estimated WACC for the firm today is 7.50% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    20048956
    20059245
    200611510
    200711939
    200811906
    200914206
    201014001
    201111405
    201212462
    201313819

    (click to enlarge)

    Average Annual Growth FCF: ~ 6%

    CAGR FCF: ~ 5%
    Consensus Forecast Industry 5-Year Growth: ~ 12% per year

    Consensus Forecast Company 5-Year Growth: ~ 7% per year

    Internal Growth Rate: ~ 6%

    Sustainable Growth Rate: ~ 11%

    Scenario 1

    • Start at $13819 million FCF
    • Assume a 5-year growth rate in FCF of 7% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    013819
    114786
    215821
    316929
    418114
    519382
    Terminal Value276333

    The firm's future free cash flows, discounted at a WACC of 7.50%, give a present value for the entire firm (Debt + Equity) of $260565 million. If the firm's fair value of debt is estimated at $15013 million, then the fair value of the firm's equity could be $245552 million. $245552 million / 2830 million outstanding shares is approximately $87 per share and a 20% margin of safety is $70/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 11% per year, then 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    013819
    115339
    217026
    318899
    420978
    523286
    Terminal Value344403
    • Present Value of the entire firm (Debt + Equity): $315975 million
    • Value of Equity: $300962 million or $106/share
    • 20% margin of safety is $85/share

    Sources

    Morningstar.com

    Yahoo! Finance

    JNJ.com

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: JNJ
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