Chasing Value: Johnson & Johnson

Posted Apr 6th 2007 3:30PM by Sheldon Liber
Filed under: Johnson and Johnson (JNJ), Chasing Value™

It is hard to believe that the Johnson & Johnson (NYSE: JNJ) company might be a value stock soon.

When entering any discussion or analysis of quality companies or stocks over the last 100 years, it is a relative certainty that JNJ will be included. This would be true whether you were considering the company history, quality of management, quality of products, diversity of products, market opportunity, investing in North America or internationally, and more. The stock is probably included in almost every index, mutual fund and portfolio that it qualifies for by both institutions and private individuals. I own it in my Roth IRA, and unless the world turns inside out and upside down, I'm not selling; and you probably could make an argument that you should not sell then either!

For all of the above reasons, Johnson & Johnson is one of the "safe haven'" stocks everyone will run to in a shaky market. A lot of investors are watching it now thinking that the time might be approaching to buy JNJ on the cheap. The problem is that this large cap stock ($178 billion) does not fly below the radar, it is one of the biggest lights on the screen. JNJ's closing stock price Thursday April 5, 2007 was $61.55; the following were its stated metrics:

JNJ has a lower trailing P/E ratio than the S&P average and a higher dividend yield. It's 2007 P/E drops further based on its 5 year growth of 12% to 15%. If you can buy this level of quality earnings for less than the market average you have to pay attention.

Dividend Yield: 2.45%
Price-to-earnings ratio - P/E: 16.22 trailing (15.42 current)

The P/S, P/B and P/CF are not any better than average but then again it is hard to find a discount on a stock that never leaves anyone's radar screen.

Price-to-sales ratio P/S: 3.36
Price-to-book ratio - P/B: 4.51
Price-to-cash-flow - P/CF: 13.51

Where you really find the power of Johnson and Johnson is in its allocation of resources, growth in shareholder value, and pricing power based on the strength of its powerful brands, supported by high quality control and developing and maintaining trust in the market place. All of these figures tower over the P/E.

Return-on-equity ratio - ROE 28.79
Return-on-assets ratio - ROA 17.74
Return-on-invested capital - ROIC: 25.41%
Profit margin 20.73%

I think I have almost talked myself into buying some more right now except the market is closed. JNJ last traded at $61.55 which is about 13% off its 52-week high of $69.41. If it moves back in that direction and you add the dividend you are looking at a possible 15% to 16% gain while owning a "defensive" stock to anchor your portfolio into retirement. Given its growth rate stated above this seems very likely. There are some, myself included, who have been waiting to buy JNJ for a couple of bucks less. But greed might leave me behind on an up-move so I might buy some now and leave some cash uncommitted in case opportunity knocks.

Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm. Check out his other posts for BloggingStocks here.

Tags: Chasing Value, ChasingValue, JNJ, Johnson and Johnson (JNJ), JohnsonAndJohnson(jnj), Sheldon Lber, SheldonLber