The intent of this report is to provide the reader with a brief overview of my various company valuations so they can independently determine their current level of investment interest.

What They Do

Johnson and Johnson is a holding company whose subsidiaries are engaged in the research and development, manufacture and sale of a broad range of health care field products in the consumer, pharmaceutical, and medicla devices markets. Industry peers include Bristol Meyers Squibb Company, Inc., Eli Lilly and Company, Inc., and Merck and Company, Inc..

Recent Business Acquisitions

In January 2019, the company acquired DR. CI:LABO, a Japanese company focused on the marketing, development and distribution of a broad range of dermocosmetic, cosmetic and skincare products for a total purchase price of approximately $2.1 billion. In April 2019 the company completed the acquisition of Auris Health, Inc. for approximately $3.4 billion. Auris Health was a privately held developer of robotic technologies, initially focused in lung cancer, with an FDA-cleared platform currently used in bronchoscopic diagnostic and therapeutic procedures. In December 2019, subsequent to the fiscal year end, the company completed the acquisition of all rights to the investigational compound bermekimab, which has multiple dermatological indications, along with certain employees from XBiotech Inc., for a purchase price of $0.8 billion.

Recent Business Divestitures

During 2019, the company divested its Advanced Sterilization Products (ASP) business to Fortive Corporation for an aggregate amount of approximately $2.8 billion.

Subsequent Events

There were no subsequent events between the company’s fiscal year-end and the filing of its most recent 10-K.

Short-Term Target

My current short-term target for the stock is $147.53, with an initial trailing stop set at $145.45. Based on a recent price of $147.66, upward price movement will find resistance at $153.38, and again at $154.25, with final resistance found at $170.21. Downward price movement will find support at $145.87 and again at $140.90, with final support found at $137.36.

Volatility Value

There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. My current beta ratio for this stock is 0.68 and my current volatility value is $217.

Quality of Earnings

A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts. Considering the company’s earnings, $0.00 per share came from sources unrelated to day to day operations and/or from income tax benefits.

Growth Target

My current growth target for the stock is $151. Growth targets are determined using a company’s year-over-year earnings growth, year-over-year PE growth, and year-over-year price growth.

Key Performance Indicator Rating

I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Be that as it may, for me, they work. Based on a 0-105 scale, my KPI for this company is 50.

Five Year Growth of $10K

Had you invested $10K in this company five years ago (12/31/14), you would have received 96 shares of stock with a cost basis of $104.57 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $145.30 per share. During that holding period, you would have collected $321 in regular and special dividends, and your initial $10K investment would have returned to you $13,895 a gain of 39% excluding regular and special dividends.

Cost of Common Equity

The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year Treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 3.39%.

Insider Transactions

The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 65 insider trades involving 836,424 shares of stock. Of those 65 insider trades, 33 were Buys involving 539,200 shares of stock, and 32 were Sells involving 297,224 shares of stock, creating an insider buy to sell ratio of 1.8 to 1.

Prior Average Valuations

My average valuation for the prior five-year fiscal period was $60. The stock price during that time period averaged $118, earnings averaged $4.88 per share, and the average PE Ratio was 24. The current PE Ratio is 22.

Enterprise and Equity Values

As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company, my enterprise value (market cap plus debt less cash) is $151 and my equity value (market cap plus cashless debt) is $144, making my E2E Ratio, 0.96.

Risk/Reward Ratio

I determine my risk-reward ratio by subtracting the current price from my terminate target and then dividing that result by my initiate target less a price fluctuation variable of 25%. What I am looking for with this ratio is a value of 5 or greater. My risk/reward ratio for this stock is 4.

Fair Value Investing

Fair value investing, more commonly known as value investing, requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. My most recent fair value estimate for this stock as an on-going concern is $154. My worksheet target prices are derivatives of my fair value estimate.

Johnson and Johnson (Nasdaq: JNJ) – FYE 12/2019 – FAIRLY VALUED – The stock is currently trading at levels above my most recent $92 initiate target, but below my most recent $193 reduce target. Please See Linked PDF Worksheet