As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that are not currently in our screens, Johnson & Johnson (JNJ).
Profile
Johnson & Johnson is the world’s largest and most diverse healthcare firm. Three divisions make up the firm: pharmaceutical, medical devices and diagnostics, and consumer. The drug and device groups represent close to 80% of sales and drive the majority of cash flows for the firm. The drug division focuses on the following therapeutic areas: immunology, oncology, neurology, pulmonary, cardiology, and metabolic diseases. The device segment focuses on orthopedics, surgery tools, vision care, and a few smaller areas. The last segment of consumer focuses on baby care, beauty, oral care, over-the-counter drugs, and women’s health. The consumer group is being divested in 2023 under the new name Kenvue. Geographically, just over half of total revenue is generated in the United States.
Recent Performance
Over the past twelve months the share price is down 4.28%.
Inputs
- Discount Rate: 6.3%
- Terminal Growth Rate: 2%
- WACC: 6.3%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2024 | 21.84 | 20.55 |
| 2025 | 22.72 | 20.11 |
| 2026 | 23.63 | 19.67 |
| 2027 | 24.58 | 19.25 |
| 2028 | 25.57 | 18.84 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 606.54 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 446.89 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 98.42 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 545.30billion
Net Debt
Net Debt = Total Debt – Total Cash = 25.53 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 519.77 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $215.94
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $215.94 | $156.41 | 27.57% |
Based on the DCF valuation, the stock is undervalued. The DCF value of $215.94 per share is higher than the current market price of $156.41. The Margin of Safety is 27.57%.
It is important to note that this valuation is based on a number of assumptions, and these assumptions could change in the future. This valuation is meant to be a back-of-the-envelope analyse that could be used as a starting point in a much more thorough valuation process. As a result, it is important to do your own research before making any investment decision.
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:
