JNJ Stock Analysis

I've started to try and consolidate my stock analysis spreadsheets to make it easier for myself to cruch numbers. I like JNJ and would love to get in but right now it seems that it's a little overvalued and there's just too many question marks about the company right now with all the recalls and accompanying bad PR plus a change at CEO.

DCF Valuation:

Using a discount rate of 10% the stock is currently overvalued by about 17%. Assuming that EPS will grow 5.70% per year for the next 5 years and terminally at 3%. If you use the discount rate based off the so-called "risk free" rate of the 10 yr treasury then the numbers are skewed since the current rate is around 2%. Since I feel that you should still take this into account since that would be the most conservative that you could get, I ran the numbers based off a 8% discount rate. Using a 8% discount rate then JNJ becomes undervalued by about 11%.

Dividend Discount Model:

For my DDM analysis I assume a discount rate that is 75% of the rate that I use for the DCF. So using a 10% DCF rate gives a 7.5% DDM rate. Assuming that JNJ can grow dividends at 6.64% for the next 5 years and 3% terminally, JNJ is currently overvalued by about 15%, giving a target price of $56.36. Running the numbers based off the 8% DCF rate you arrive at JNJ being undervalued by about 11% with a target price of $73.26. These calculations are highly dependent on the inputs.

Graham Number:

We'll add Mr. Benjamin Graham's number which is the square root of 22.5 * TTM EPS * BVPS. The Graham Number gives a fair price of $40.56 meaning that JNJ is currently overvalued by about 60%.

Avg. High Dividend Yield:

The average high dividend yield for the past 10 years is 3.11%, while JNJ has a current dividend yield of 3.50%. This means that shares are currently undervalued by about 17%. Theoretically the average high yield for the previous 10 years should be the approximate high yield that you will get during any given year. I think these numbers are skewed to give a higher target price based on the abnormally low yields earlier in the 2000's thanks to the overexuberance of the stock market at the time.

Avg: Low P/E:

The average low PE over the past 10 years is 15.29 and the current TTM PE is 18.62 with a Foward PE of 11.97. Much like the average high dividend yield, I feel that these numbers are skewed thanks to the overvaluation of the market in general in the early 2000's. JNJ was trading at an average low PE of 25.67 between 2001 and 2005. This has a big effect on the 10 year average low PE. The last 5 year PE is 13.52 compared to the 15.29 for the 10 year average.


JNJ's Gross Margin contracted slightly from 69.49% to 68.69%. I'm not worried about that. Their Profit Margin has contracted from 21.65% down to 14.87%. This is most likely due to one time issues due to the recalls. I don't like to see the Cash to Debt ratio moving down although they do still have enough cash to cover their long-term debt obligations. The dividend payout ratio is 65% however that is another issue related to the reduced EPS that should be a one time issue.

If you take the average share price given from the 5 models you get a $61.76 meaning that JNJ is overvalued by about 5% at $65 per share. Based on these calculations and the questions about how they will deal with the recall issues and a new CEO I don't feel that JNJ offers good value at this time. While some models say that it's undervalued by as much as 10% I don't think there is enough margin of safety built in right now.