Current Price: ~ $65/share

Projected Yield: ~ 3.54%

Johnson & Johnson ranks as the world's largest and most diverse health-care company. The company comprises three divisions: pharmaceutical, medical devices and diagnostics, and consumer. While the pharmaceutical division currently represents close to 36% of total sales, we expect patent losses and the Synthes acquisition to reduce this proportion to approximately 27% during the next 10 years, with the device segment picking up the majority of the share.

Estimated WACC for the firm today is 7.16% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year | FCF $Millions |

2002 | 6077 |

2003 | 8333 |

2004 | 8956 |

2005 | 9245 |

2006 | 11510 |

2007 | 11939 |

2008 | 11906 |

2009 | 14206 |

2010 | 14001 |

2011 | 11405 |

Average Annual Growth FCF: ~ 8%

CAGR FCF: ~ 7%

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

Consensus Forecast Company 5-Year Growth: ~ 6% per year

Internal Growth Rate: ~ 3%

Sustainable Growth Rate: ~ 6%

**Scenario 1**

Average FCF (2011, 2010) is $12703 million

- Start at $12703 million FCF
- Assume a 5-year growth rate in FCF of 6% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 12703 |

1 | 13465 |

2 | 14273 |

3 | 15129 |

4 | 16037 |

5 | 16999 |

Terminal Value | 251581 |

The firm's future cash flows, discounted at a WACC of 7.16%, give a present value for the entire firm (Debt + Equity) of $239496 million. If the firm's fair value of debt is estimated at $15585 million, then the fair value of the firm's equity could be $223911 million. $223911 million / 2750 million outstanding shares is approximately $81 per share and a 20% margin of safety is $65/share.

**Scenario 2**

All else being equal,

- Assume a 5-year growth rate in FCF of 2% per year, then 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year | FCF $Millions |

0 | 12703 |

1 | 12957 |

2 | 13216 |

3 | 13481 |

4 | 13750 |

5 | 14025 |

Terminal Value | 199730 |

- Present Value of the entire firm (Debt + Equity): $196233 million
- Value of Equity: $180648 million or $66/share
- 20% margin of safety is $53/share

Sources

**Disclosure: **I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.