Stock Analysis on Net
Stock Analysis on Net
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Johnson & Johnson (NYSE:JNJ)

Present Value of Free Cash Flow to Equity (FCFE)

Intermediate level

Intrinsic Stock Value (Valuation Summary)

Johnson & Johnson, free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 8.95%
01 FCFE0 17,037
1 FCFE1 14,138 = 17,037 × (1 + -17.01%) 12,977
2 FCFE2 12,504 = 14,138 × (1 + -11.56%) 10,534
3 FCFE3 11,740 = 12,504 × (1 + -6.11%) 9,078
4 FCFE4 11,664 = 11,740 × (1 + -0.65%) 8,278
5 FCFE5 12,224 = 11,664 × (1 + 4.80%) 7,963
5 Terminal value (TV5) 308,922 = 12,224 × (1 + 4.80%) ÷ (8.95%4.80%) 201,243
Intrinsic value of Johnson & Johnson’s common stock 250,074
 
Intrinsic value of Johnson & Johnson’s common stock (per share) $94.99
Current share price $163.55

Based on: 10-K (filing date: 2020-02-18).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 1.66%
Expected rate of return on market portfolio2 E(RM) 12.12%
Systematic risk of Johnson & Johnson’s common stock βJNJ 0.70
 
Required rate of return on Johnson & Johnson’s common stock3 rJNJ 8.95%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rJNJ = RF + βJNJ [E(RM) – RF]
= 1.66% + 0.70 [12.12%1.66%]
= 8.95%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Johnson & Johnson, PRAT model

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Average Dec 29, 2019 Dec 30, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US$ in millions)
Cash dividends paid 9,917  9,494  8,943  8,621  8,173 
Net earnings 15,119  15,297  1,300  16,540  15,409 
Sales to customers 82,059  81,581  76,450  71,890  70,074 
Total assets 157,728  152,954  157,303  141,208  133,411 
Shareholders’ equity 59,471  59,752  60,160  70,418  71,150 
Financial Ratios
Retention rate1 0.34 0.38 -5.88 0.48 0.47
Profit margin2 18.42% 18.75% 1.70% 23.01% 21.99%
Asset turnover3 0.52 0.53 0.49 0.51 0.53
Financial leverage4 2.65 2.56 2.61 2.01 1.88
Averages
Retention rate -0.84
Profit margin 16.77%
Asset turnover 0.51
Financial leverage 2.34
 
FCFE growth rate (g)5 -17.01%

Based on: 10-K (filing date: 2020-02-18), 10-K (filing date: 2019-02-20), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-27), 10-K (filing date: 2016-02-24).

2019 Calculations

1 Retention rate = (Net earnings – Cash dividends paid) ÷ Net earnings
= (15,1199,917) ÷ 15,119
= 0.34

2 Profit margin = 100 × Net earnings ÷ Sales to customers
= 100 × 15,119 ÷ 82,059
= 18.42%

3 Asset turnover = Sales to customers ÷ Total assets
= 82,059 ÷ 157,728
= 0.52

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 157,728 ÷ 59,471
= 2.65

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.84 × 16.77% × 0.51 × 2.34
= -17.01%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (430,552 × 8.95%17,037) ÷ (430,552 + 17,037)
= 4.80%

where:
Equity market value0 = current market value of Johnson & Johnson’s common stock (US$ in millions)
FCFE0 = the last year Johnson & Johnson’s free cash flow to equity (US$ in millions)
r = required rate of return on Johnson & Johnson’s common stock


FCFE growth rate (g) forecast

Johnson & Johnson, H-model

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Year Value gt
1 g1 -17.01%
2 g2 -11.56%
3 g3 -6.11%
4 g4 -0.65%
5 and thereafter g5 4.80%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= -17.01% + (4.80%-17.01%) × (2 – 1) ÷ (5 – 1)
= -11.56%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -17.01% + (4.80%-17.01%) × (3 – 1) ÷ (5 – 1)
= -6.11%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -17.01% + (4.80%-17.01%) × (4 – 1) ÷ (5 – 1)
= -0.65%