Can Johnson & Johnson Upset Chevron In The Divisional Round?

| About: Johnson & (JNJ)

Summary

Chevron is up 40% excluding dividends in the past year (up 44.3% including dividends).

J&J is up 18.3% excluding dividends (up 21.1% including dividends).

J&J upset JPMorgan in the Wild Card Round and looks to do the same to Chevron in the Divisional Round.

In the divisional round of the Dow Industrials Playoffs we have # 12 seeded Johnson & Johnson (NYSE:JNJ) taking on # 4 seeded Chevron Corporation (NYSE:CVX). J&J engages in research and development, manufacture and sale of personal care hygienic products, pharmaceuticals and surgical equipment while Chevron engages in the business of integrated energy and chemical operations.

The following table depicts the recent earnings reports for each company:

Ticker

Earnings

Date

Actual EPS

($/share)

Estimated EPS

($/share)

Actual Revenue

($ in billions)

Estimated Revenue

($ in billions)

JNJ

18Oct16

1.68

1.65

17.82

17.71

CVX

28Oct16

0.68

0.37

30.14

29.05

Chevron is up 40% excluding dividends in the past year (up 44.3% including dividends) while J&J is up 18.3% excluding dividends (up 21.1% including dividends), and the S&P 500 has gained 18.1% in the same time frame. This matchup will be played out in a best of seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven game series click here. Not all the metrics will be looked at if a team can win and win early. This matchup will determine the winner which will proceed to the conference finals where they will face either Caterpillar (NYSE:CAT) or Verizon (NYSE:VZ).

Forward P/E

Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next twelve months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing twelve month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. J&J carries a 1-year forward-looking P/E ratio of 16.29 which is fairly priced for the future right now while Chevron's 1-year forward-looking P/E ratio of 25.24 is also fairly priced. Game 1 goes to J&J by virtue of having the lower value.

1-yr PEG

This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone. The 1-year PEG ratio for J&J is currently at 3.27 based on a 1-yr earnings growth of 6.23% while Chevron's 1-yr PEG ratio is not applicable (because they don't have any trailing twelve month earnings) based on a 1-yr earnings growth rate of 230.55%. J&J takes Game Two to go up two to nothing in the series.

EPS Growth Next Year

This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above. J&J has a projected EPS growth rate of 6.23% while Chevron sports a growth rate of a whopping 230.55%. Chevron puts a knockout punch to J&J in Game Three and won their first game of the series.

Dividend Yield

Dividend yield is a no brainer; it must be had in a portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing twelve month earnings. J&J pays a dividend of 2.75% with a payout ratio of 56% of trailing 12-month earnings while Chevron pays a dividend of 3.76% with a payout ratio of over 100% of trailing 12-month earnings. Chevron wins Game Four of the series despite having an astronomical payout ratio by virtue of having the higher yield and evens the series at two games.

Return on Assets

Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less assets. J&J is showing an 11.6% efficiency rate on their assets while Chevron is only showing-0.6% efficiency. With this victory J&J is one game closer to advancing to the next round.

Return on Equity

Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament, I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better. J&J proves its efficiency of managing its shareholders' equity to be 22.1% while Chevron sports a value of-1%. By winning this game, J&J defeats Chevron and advances to the conference finals!

Conclusion

This seemed like a matchup that Chevron should have won but I guess J&J had something to prove. Chevron may likely struggle in the year ahead if oil prices don't begin to rise which makes me thing the stock may have topped out here. J&J may just be the surprise of 2017 as there expects to be lots of wheeling and dealing going on in the healthcare sector. I'm excited to see J&J advance to the next round to play the winner between Caterpillar and Verizon.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long JNJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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