Hello and WELCOME business analysts. Let’s see what we can learn “together” about evaluating a giant multi-segment business. Johnson and Johnson (JNJ) is a giant, producing and selling many different products.
TENATIVE SCHEDULE (We can see how the discussion moves along we can be flexible)
– Tues. Introduction & JNJ Overview – SSG Visual Analysis
– Wed. SSG – Evaluating Management Section 2A & 2B
– Thur. SSG – Price/Earnings Section 3
– Fri. SSG – Evaluating Risk & Reward & 5 Year Potential – Sections 4-5
or Sat. – Lowell Herr Presentation of Group Think Results – or whenever would like to present the results.
– Mon. JNJ Summary
A suggestion is to look for companies in an industry that you have an interest in following, as well as one that seems understandable to you. For example, my interest in JNJ stemmed from my interest in the drug-coated stent that I had been reading about and how these stents will be billion dollar block buster devices. Also as one that is getting “older” I find myself wanting to read about medical devices. Recently my Mom had a “filter” inserted in her large vein in the groin. This filter is a true life-saver – it stops any blod clots from reaching the heart, lungs, or brain which will kill you quickly. Medical technology is simply amazing. Constantly thinking, “now how do they do that?” I just find the whole area of medical devices/supplies fascinating, not to mention a personal interest now that my Mom has this filter.
DOING SOME SCREENING FOR THE STUDY:
I look at the historical data and can tell immediately if I want to continue the study or not.
The next thing I like to do is turn to the company’s website and see what I can learn about the company.
First, you won’t suffer from lack of information – perhaps the opposite anything and everything you’d ever want to know is there. It is easy to navigate. Clicking on Investor Relations you can easily see links to important items such as JNJ’s pipeline of drugs, financial reports, presentations, and so on. The Fast Facts section under Our Company link gets one up to speed quickly on what JNJ is about – history, products, etc.
You are trying to glean a picture of the business – the products they sell, who they sell their stuff too, anything special about their products, etc?
We will begin learning about and examining the SSG for JNJ along with the PERT-A worksheet in my next post. I have attached both as an Adobe Acrobat PDF file. If you are unable to access the documents just send me an e-mail and perhaps if I send to you privately you will have more success.
If you need my e-mail: evslucy@yahoo.com
As we get further into our Study we will also be looking at the results to the “Group Think.” THANKS to Lowell Herr who is compiling judgments of 21 respondents for continued discussion.
INTRODUCTION - Johnson & Johnson (JNJ)
I selected Johnson and Johnson (JNJ) - as a stock to study because it defines the qualities that a long-term NAIC investor would seek in a great growth company. Like few others, Johnson and Johnson could perhaps be deemed NAIC growth company of the decade in my opinion. J&J has been the model of a successful large-cap growth company. The goal of this study is to answer the two key questions that NAIC investor’s seek to answer:
1. Is It a Good Company?
• Growth of Sales & Earnings
• How profitable is the company?
• Does the company have outstanding management?
2. Can we purchase part ownership in the company at a reasonable price?
This study of JNJ will include an analysis of my completed SSG along with information that hopefully supports the SSG and its judgments.
WHAT CAUGHT MY ATTENTION
Sales 15.3% 11.9% 11.7%
Diluted Earnings per Share 11.1% 18.7% 14.3%
Dividend Growth 16.4% 13.6% 13.8%
Total Return to Shareholders (2.1)% 5.7% 18.3%
Worldwide Market Leadership
• Largest Medical Device company
• 4th largest Pharmaceutical company globally
· Pharmaceutical business
Ev,The above link took me to Hibbett Sports. Is this happening to anyone else. I don't want to get off subject but the link may be set up incorrectly.Lowell ---Edited by David Ehresman to fix link
http://better-investing.org/articles/web/5736
Recent Quarterly Results seen on the left hand-side box 6/30/2004 indicate a 11.1% increase in Sales, and a 17.1% increase in Earnings Per Share (EPS) from the same quarter a year ago – tremendous growth for a company the size of JNJ.
SSG GRAPH – VISUAL ANALYSIS
The equation is:
Sales - Expenses = Pre-Tax Profits - Taxes = Earnings / Shares Outstanding = EPS
EPS Growth = 10.5%
Sales Growth = 13.7%
5 Years
EPS Growth = 11.2%
Sales Growth = 14.5%
The above link took me to Hibbett Sports. Is this happening to anyone else.
It is the link to Hibbett Sports; one can tell by letting the mouse hover over the link and look in the lower left corner of the screen, where the address is given.
My TK5 calculates the Estimate High Earnings/Share as $4.09; hence, a Forecast High Price $102.3. Did anyone get this? If I input $4.47 as the Estimate High Earnings/Share, the estimated EPS on page one changes to 12.0 TIA.
Dan
10 Years -
Ev,
I believe you have the eps and the sales percentages reversed for both 10 years and 5 years. As you posted to the i-c-l, eps growth has consistently outpaced sales growth for this company.
Rip west
Ev
Super analysis thus far. You are doing a thorough and well planned approach. Anyone following your approach is sure to improve their stock analysis capabilities.
By going to the JNJ home page you mentioned and looking at the recent presentation given to analysts I discovered two things I did not previously realize.
1) JNJ is 1st in Orthopaedics. This may not sound like much but the other three players in Orthopaedics are Biomet, Stryker and Zimmer. Each of these in my view are superb companies and if JNJ is no 1 is puts this segment on the top of the heap. Or as George Nicholson advocated an industry leader.
2) The annual report that showed the JNJ Consumer area having an operating profit margin of 18.7%, the Pharma 30.2% and Medical products 22.6. The JNJ Analysts presentation indicated the future growth was expected to mainly come from the Pharma and Medical products areas. Thus this would tend to indicate an expected ongoing increase in PTP/S as shown in 2A. Although I can not locate the historic breakdown I suspect this trend has been going on in the past and may be a key reason for the positive trend in 2A and for specifically for EPS growing faster than sales on the visual analysis.
The message here is an investor should always check out the web site of company being analyzed to see what the company has to say. I view information from the company executives to be of higher value than that of the analysts following the company. So thanks for the nudge and I learned something about JNJ today I did not previously know but should have.
Dan Hess
What did you use for your Average High P/E - which will then change your Forecast High Price.
Ev, I input:
Est. Sales Growth = 9.0
Est. EPS Growth = 10.0
Ave. High P/E = 25.0
Ave Low P/E = 18.0
I get:
Estimate High Earnings/Share = 4.09 (Same results on a second computer -- Win XP on one and Win ME on the second)
Estimate Low Earnings/Share = 2.54
Thanks.
Nancy CraysNAIC Forum - Long term investing made simpleClick on the Forum name to visit us
Lowell,
Thanks for catching the bad link. I have fixed it in the orginal message. I also fixed it in your quoteback to help prevent distraction for those trying to follow the study.
David
First of all, thanks for making this study happen. You are off to a superb start. I would especially encourage lurkers and/or newbies to jump in and ask as many questions in this study as possible. As a matter of fact, I challenge you to ask so many questions that we'd like to see who gets exhausted first!
In regards to what Dan has mentioned:
But the pharmas are somewhat unique. They must invest large sums in R&D todevelop new drugs often many years in advance of any revenue. Theaccounting rules required by GAAP require these costs to be expensed asopposed to capitalized. Thus the expenses to develop a drug that producesrevenue and profits in 2004 may have been charged against earnings from 2003and earlier years. This can continue to occur for many years due to patentprotection. Thus when the drugs finally reach the marketplace they resultin high profit margins. Thus the upward trend in margins is in realitypartially due to the way GAAP requires the expenses to be charged.
The business model of pharmas derive their profit from knowledge capital i.e. patents. To bring a new drug to market, it takes anywhere between 10 to 15 years with a capital outlay of about $800 million if not more (see http://www.phrma.org/publications/publications//2004-03-31.937.pdf for more details). The risks and stakes to bring a new drug to market are very high. As Dan has mentioned, all the research costs have been expensed over the years. When the new drug gets FDA approval, it enjoys patent protection and a virtual lock on the profits. Since the R&D capital has already been expensed over the previous years and not a single penny of sale or profit is realized in those years, the company will now enjoy tremendous profits until the patent expires. If I recall correctly, the economists call the $800M "sunk costs". Another word that is used is pre-production cost which in this case is $800M to bring a new product to market. You can think of the first pill to hit the market to cost $800M and the rest is just profits. Business models that exhibit this behavior are said to have high operating leverage. In short, companies that leverage knowledge capital are said to have high pre-production costs and enjoy high operating leverage. This is the reason why the earnings growth rate is typically higher than sales growth rate for long periods of time.
Bakul
I looked at my SSG several times and still get the same $4.47 @ 10% estimated EPS growth on the front.Do you see any differences?
Ev, I asked a friend to do the numbers on his computer. His Estimate High Earnings/Share = $4.09 @ 10% Estimated Future Earnings Per Share Growth on the front. Your EPS values (page 2, section 3, column C) are the same as mine; hence, one would assume that the Estimate High Earnings/Share would be the same. It is rather odd that (as far as I can tell) is the only variation.
Hopefully, others will indicate what their values are.
