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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:

    Year FCF $Millions
    2004 8956
    2005 9245
    2006 11510
    2007 11939
    2008 11906
    2009 14206
    2010 14001
    2011 11405
    2012 12462
    2013 13819

    (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

    Year FCF $Millions
    0 13819
    1 14786
    2 15821
    3 16929
    4 18114
    5 19382
    Terminal Value 276333

    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

    Year FCF $Millions
    0 13819
    1 15339
    2 17026
    3 18899
    4 20978
    5 23286
    Terminal Value 344403
    • 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


    Yahoo! Finance

    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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