论文部分内容阅读
Abstract：As the largest world’s health care company， Johnson & Johnson （JNJ.） extends its business around the world； whether the company is worth investing in is a concern for the investors. This study found that JNJ presented superior profitability and growth tendency， which enhanced continually in the past few years. Based on DCF and RE Model， its stock price was estimated and the recommendation of buying was given.
Keywords： financial analysis；corporate valuation，
Johnson&Johnson has established company strategies in several aspects， such as research and development， building shareholders value and strategic acquisitions. Those strategies are beneficial for JNJ to enhance profitability and long-term growth. For instance， the profit margin of JNJ increased from 15.84% in 2001 to 22.76% in 2015， which is contributed by the higher sales. JNJ annual report （2015） demonstrated that new products accounted for 25% of sales. For the big expenditure in R&D， it helps JNJ to delivered new and differentiated products and services to meet the needs of health care and sustain company’s long-run development. Besides， financial analysis is given below to demonstrate its behavior in profitability and growth.
1. Profitability analysis
Fromthe table 1 above， it shows that the ROCE of JNJ steadily increased from 2011 to 2015. Although all the ratios changed during 2011 to 2015， the increase of Profit Margin （PM）， from 15.84% to 22.76%， gave a positive impact to the ROCE， and implied that the firm’s profit was mainly driven by its operation. While the decrease of ATO and FLEV negatively affect the ROCE. In fact， JNJ hold a great many cash equivalent but they did not generate much interest income， affecting the profitability of JNJ.
As informationfor the industry is insufficient， JNJ’s competitors’ performance was utilized to calculate the benchmark of the profitability roughly. From the table 2 above， JNJ’s ROCE is higher than the industry’s， in this way， JNJ seems more profitable than its competitors.
AlthoughJNJ’s asset turnover （ATO） is higher than the industry average， it is not very high as the average ATO is about 2.0 for a company. JNJ’s PM is better than the industry average. As a drug manufacturer， JNJ needs to invest a lot in R&D to maintain its advantage. Due to this operating characteristic， its PM should be high but not the ATO. If JNJ can sustain or increase its PM， its ROCE will increase.
2.Growth analysis In general， the growth of JNJ Company presents a stable increasing tendency in the past several years. As shown in table 3， the amount of sales in 2015 was lower than that in 2014， mainly due to lower sales in international market and in wound care franchise and medical devices. And it contributed to the reduction of earnings in 2015. ROCE decreased on the falling of equity investment， leading to lower residual earnings and negative abnormal earnings growth （AEG）， which implied the investment earnings failed to meet the required rate of return in 2015.
From 2011 to 2014， the company maintained a positive growth rate in sales， earnings and equity investment， with a high ROCE. During 2012 and 2014， AEG was highly positive with increasing residual earnings and earnings growth rate. In 2011， net earnings were lower than previous year， with highly negative abnormal earnings growth， which may due to the significantly growing other expenses and the higher advertising and R&D expenditures.
3.Trend analysis
As table 4 shows， in the income statement， the growth of sales leads to growth in operating income from sales after tax of 18%， and growth in core operating income of the same level over the five years. Also， cost of sales increased faster than sales， and the gross margin grew at a lower rate than sales. Sales increased slower than NOA， except for 2011， which implies that fewer sales were obtained for every dollar invested in these assets.
In the balance sheet， index of NOA indicates that JNJ reduced investments in operations after 2013 because the growth rates present a declinetrend. CSE shows that there is a significantly rapid growth in the owners’ investment with a rate of 25.8%. And NFA tracks the situation of a volatile net indebtedness and a growing tendency during these years； for instance， the growth rate of NFA in 2015 was 32.21%， higher than that in 2014， namely 24.7%. In general， JNJ has an increasing tendency in sales， core operating income， firm’s assets and equity investments.
4.Valuation
4.1Discount cash flow valuation
Discounted Cash Flow Model （DCF） values all the projects in a firm’s operation by calculating the present value of expected cash flows. And it estimates what amount of money the firm is supposed to earn from its assets over time， placing an intrinsic value. Therefore， it is used to form a basic view on JNJ’s reasonable price and a conservative valuation.
2015 experienced a 51.63% increase in operating income after tax from 8，689 million to 13，175 million， but it is based on 48.82% drop in 2014， mainly resulting from foreign currency translation losses and employee benefit expenses in the year. In fact， the figure of 2015 decreases 22.4% from that of 2013. If we look at the big picture， the company’s businesses are subject to increasingly stringent governmental regulation in several countries where its operation might be restricted （Johnson& Johnson 2015， p. 4）. The global economy with fluctuation in currency exchange rate also imposes an unfavorable impact which is unlikely to recover and boom again within a couple of years. Therefore， although average growth rate of operating income after tax from 2011 to 2015— 11.7% seems a little low compared with its normal annual growth， it is actually reasonable to be adopted as the forecasting growth rate. To support a conservative projection for a mature companysuch as JNJ， after the horizon， operating income is assumed to grow at average US GDP growth from 2016 to 2060 of 2.21% forecasted by OECD.
The average growth rate of net operating assets from 2011 to 2015 is 4.28%. As discussed before， new products accounted for approximately 25% of 2015 sales and the competitive environment requires substantial investments in continuing research and expenditures for advertising and promotion. Hence， although NOA shows a decreasing trend since 2013， we forecast JNJ will remain committed to investing in R&D （intangible asset） and steadily purchasing more PPE correspondingly. Both of them are main components of operating assets for the company. The estimate of 4.28% is stable and do not need to be adjusted downwards. All free cash flows are discounted at the firm’s WACC （7.77%）， obtained by averaging the prior 5 years’ figures from Bloomberg （2016）.
4.2Residual Earnings Valuation
Residual Earnings Model contains anchor value and extra value of a firm. It focuses on value drivers and measures value added in earnings over required return， providing a more solid and meaningful valuation than DCF.
Due to the growing ROCE and book value， it is inappropriate to expect RE to be constant or zero after 2020. In the growth analysis above， we also indicate a sound sustainable long-term growth rate. The residual earnings growth is forecasted to continue at a constant rate that equals to US GDP growth （2.21%） because competition will drive the profitability down. The model is modified to：
VE0=B0+RE1ρE+RE2ρ2E+…+RETρTE+RET+1ρE-g/ρTE
The equity cost of capital is measured by the capital asset pricing model （CAPM） （Penman 2010， p. 155）， which consists of 10-year AU government bond yields— 2.17%， β of JNJ vs. SPX— 0.83 and 1 year return of SPX— 10.66% respectively （Bloomberg 2016）. ρE=rf+βrm-rf=2.17%+0.83*10.66%-2.17%=9.22%
Earnings growth forecasted byZacks Investment Research （2016） is directly leveraged to estimate the growth rate of EPS in RE model as shown in the valuation， and payout ratio is estimated to be 0.566.
DCF and RE approaches both yield higher value per share with $126.38 and $133.04 than current price （$118.76） in the case that GDP growth is employed to calculate continuing value. In reality， as one of industry leaders， JNJ is expected to deliver better performance， and its stock price has great potential to increase within next 12 months. Current economic environment and industry tendency also contribute to sustain JNJ’s growth ability within next three years. Therefore， a recommendation of 'buy' is offered with confidence.
Reference list：
[1]Benson， M. 2015， Analyzing Johnson & Johnson’s Three Main Business Segments， Market Realist， viewed 3 Ocober 2016， .
[2]Johnson & Johnson Analyst Forecasts Earnings Growth 2016， Zacks Investment Research， viewed 2 October 2016，http：//www.nasdaq.com/symbol/jnj/earnings-growth.
[3]Penman， Stephen H. 2010， Financial statement analysis and security valuation， McGraw-Hill， New York.
Author profile：
Yanting Zhang，Huan Fang，Guangzhou College of Technology and Business。
Keywords： financial analysis；corporate valuation，
Johnson&Johnson has established company strategies in several aspects， such as research and development， building shareholders value and strategic acquisitions. Those strategies are beneficial for JNJ to enhance profitability and long-term growth. For instance， the profit margin of JNJ increased from 15.84% in 2001 to 22.76% in 2015， which is contributed by the higher sales. JNJ annual report （2015） demonstrated that new products accounted for 25% of sales. For the big expenditure in R&D， it helps JNJ to delivered new and differentiated products and services to meet the needs of health care and sustain company’s long-run development. Besides， financial analysis is given below to demonstrate its behavior in profitability and growth.
1. Profitability analysis
Fromthe table 1 above， it shows that the ROCE of JNJ steadily increased from 2011 to 2015. Although all the ratios changed during 2011 to 2015， the increase of Profit Margin （PM）， from 15.84% to 22.76%， gave a positive impact to the ROCE， and implied that the firm’s profit was mainly driven by its operation. While the decrease of ATO and FLEV negatively affect the ROCE. In fact， JNJ hold a great many cash equivalent but they did not generate much interest income， affecting the profitability of JNJ.
As informationfor the industry is insufficient， JNJ’s competitors’ performance was utilized to calculate the benchmark of the profitability roughly. From the table 2 above， JNJ’s ROCE is higher than the industry’s， in this way， JNJ seems more profitable than its competitors.
AlthoughJNJ’s asset turnover （ATO） is higher than the industry average， it is not very high as the average ATO is about 2.0 for a company. JNJ’s PM is better than the industry average. As a drug manufacturer， JNJ needs to invest a lot in R&D to maintain its advantage. Due to this operating characteristic， its PM should be high but not the ATO. If JNJ can sustain or increase its PM， its ROCE will increase.
2.Growth analysis In general， the growth of JNJ Company presents a stable increasing tendency in the past several years. As shown in table 3， the amount of sales in 2015 was lower than that in 2014， mainly due to lower sales in international market and in wound care franchise and medical devices. And it contributed to the reduction of earnings in 2015. ROCE decreased on the falling of equity investment， leading to lower residual earnings and negative abnormal earnings growth （AEG）， which implied the investment earnings failed to meet the required rate of return in 2015.
From 2011 to 2014， the company maintained a positive growth rate in sales， earnings and equity investment， with a high ROCE. During 2012 and 2014， AEG was highly positive with increasing residual earnings and earnings growth rate. In 2011， net earnings were lower than previous year， with highly negative abnormal earnings growth， which may due to the significantly growing other expenses and the higher advertising and R&D expenditures.
3.Trend analysis
As table 4 shows， in the income statement， the growth of sales leads to growth in operating income from sales after tax of 18%， and growth in core operating income of the same level over the five years. Also， cost of sales increased faster than sales， and the gross margin grew at a lower rate than sales. Sales increased slower than NOA， except for 2011， which implies that fewer sales were obtained for every dollar invested in these assets.
In the balance sheet， index of NOA indicates that JNJ reduced investments in operations after 2013 because the growth rates present a declinetrend. CSE shows that there is a significantly rapid growth in the owners’ investment with a rate of 25.8%. And NFA tracks the situation of a volatile net indebtedness and a growing tendency during these years； for instance， the growth rate of NFA in 2015 was 32.21%， higher than that in 2014， namely 24.7%. In general， JNJ has an increasing tendency in sales， core operating income， firm’s assets and equity investments.
4.Valuation
4.1Discount cash flow valuation
Discounted Cash Flow Model （DCF） values all the projects in a firm’s operation by calculating the present value of expected cash flows. And it estimates what amount of money the firm is supposed to earn from its assets over time， placing an intrinsic value. Therefore， it is used to form a basic view on JNJ’s reasonable price and a conservative valuation.
2015 experienced a 51.63% increase in operating income after tax from 8，689 million to 13，175 million， but it is based on 48.82% drop in 2014， mainly resulting from foreign currency translation losses and employee benefit expenses in the year. In fact， the figure of 2015 decreases 22.4% from that of 2013. If we look at the big picture， the company’s businesses are subject to increasingly stringent governmental regulation in several countries where its operation might be restricted （Johnson& Johnson 2015， p. 4）. The global economy with fluctuation in currency exchange rate also imposes an unfavorable impact which is unlikely to recover and boom again within a couple of years. Therefore， although average growth rate of operating income after tax from 2011 to 2015— 11.7% seems a little low compared with its normal annual growth， it is actually reasonable to be adopted as the forecasting growth rate. To support a conservative projection for a mature companysuch as JNJ， after the horizon， operating income is assumed to grow at average US GDP growth from 2016 to 2060 of 2.21% forecasted by OECD.
The average growth rate of net operating assets from 2011 to 2015 is 4.28%. As discussed before， new products accounted for approximately 25% of 2015 sales and the competitive environment requires substantial investments in continuing research and expenditures for advertising and promotion. Hence， although NOA shows a decreasing trend since 2013， we forecast JNJ will remain committed to investing in R&D （intangible asset） and steadily purchasing more PPE correspondingly. Both of them are main components of operating assets for the company. The estimate of 4.28% is stable and do not need to be adjusted downwards. All free cash flows are discounted at the firm’s WACC （7.77%）， obtained by averaging the prior 5 years’ figures from Bloomberg （2016）.
4.2Residual Earnings Valuation
Residual Earnings Model contains anchor value and extra value of a firm. It focuses on value drivers and measures value added in earnings over required return， providing a more solid and meaningful valuation than DCF.
Due to the growing ROCE and book value， it is inappropriate to expect RE to be constant or zero after 2020. In the growth analysis above， we also indicate a sound sustainable long-term growth rate. The residual earnings growth is forecasted to continue at a constant rate that equals to US GDP growth （2.21%） because competition will drive the profitability down. The model is modified to：
VE0=B0+RE1ρE+RE2ρ2E+…+RETρTE+RET+1ρE-g/ρTE
The equity cost of capital is measured by the capital asset pricing model （CAPM） （Penman 2010， p. 155）， which consists of 10-year AU government bond yields— 2.17%， β of JNJ vs. SPX— 0.83 and 1 year return of SPX— 10.66% respectively （Bloomberg 2016）. ρE=rf+βrm-rf=2.17%+0.83*10.66%-2.17%=9.22%
Earnings growth forecasted byZacks Investment Research （2016） is directly leveraged to estimate the growth rate of EPS in RE model as shown in the valuation， and payout ratio is estimated to be 0.566.
DCF and RE approaches both yield higher value per share with $126.38 and $133.04 than current price （$118.76） in the case that GDP growth is employed to calculate continuing value. In reality， as one of industry leaders， JNJ is expected to deliver better performance， and its stock price has great potential to increase within next 12 months. Current economic environment and industry tendency also contribute to sustain JNJ’s growth ability within next three years. Therefore， a recommendation of 'buy' is offered with confidence.
Reference list：
[1]Benson， M. 2015， Analyzing Johnson & Johnson’s Three Main Business Segments， Market Realist， viewed 3 Ocober 2016， .
[2]Johnson & Johnson Analyst Forecasts Earnings Growth 2016， Zacks Investment Research， viewed 2 October 2016，http：//www.nasdaq.com/symbol/jnj/earnings-growth.
[3]Penman， Stephen H. 2010， Financial statement analysis and security valuation， McGraw-Hill， New York.
Author profile：
Yanting Zhang，Huan Fang，Guangzhou College of Technology and Business。