Tuesday, January 26, 2010

Johnson & Johnson sees first annual sales decline in 76 years... (JNJ)

But fourth quarter revenue did increase from the year-ago period.

JNJ is facing challenges on multiple fronts. It's prescription drug business continues to face challenges from generic competition, and this will only get worse if the president gets his way on shortening patent protection timeframes. The company is also not immune to the weak economy, as elective surgeries see a decline, and their consumer division is challenged by trade-downs to private label products. Everything from contact lens sales to diabetes-test strips are under pressure, as more and more healthcare items become "discretionary."

Gross margin took a hit in the quarter, but the company made most of that back by reducing SG&A costs:

On thing I like right off the bat from their earnings presentation is the comparison of their original guidance to actual 2009 results - they came in VERY accurate on their predictions, giving us confidence in future guidance.

In their outlook, JNJ sees global healthcare spending increasing about 5.4% annually between now and 2014 with 2014 worldwide spending of $6.8trillion. International results have been very strong, as healthcare coverage in the developing world expands at a rapid pace:

2010 Free Cash Flow Yield, based on by FCF estimate of about $13.8billion, is a FAT JUICY 8.6%. The denominator I use is Market Value - Cash, causing people to wonder why I net out cash but don't add back debt. I exclude debt because if you bought the company and assumed the debt, they still earn 53times their quarterly interest payments.

That 8.6% Free Cash Flow Yield is far too rich for a company like this, despite clear headwinds. So what's an appropriate yield? I'll look to their debt, with full knowledge that it's overpriced. JNJ's
2029 6.95% notes are trading at 123cents on the dollar, to yield 5%. I think a Free Cash Flow Yield (FCFY) is easily fair for this company, suggesting a stock price of $75 a share once cash is added back. That's a 20% gain and only a Price-to-Earnings ratio of 14 for a world class company. Stocks like this are why I see bigger gains ahead for the DJIA.

Copyright 2010 AlphaNinja

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