The stock market, as evidenced by the events of the past several years, is a delicate thing. Uncertainties regarding the market abide with justification. Not many market participants foresaw the extent to which the world markets would be affected by the Asian financial crisis. The news of widespread financial failures in Southeast Asia and Japan hit the American, European, and Latin American markets with force, with net losses of 10%-50% and up of the total stock market value. Yet, within months many of the battered markets, especially the American markets, have rebounded to record highs. In the wake of President Clinton’s sex scandal and his recent impeachment, today’s stock market investor is posed with the serious threat of market volatility.
Johnson and Johnson, Inc. (NYSE: JNJ) is a company that is very suitable for the needs of today’s cautious investor. It is one of the world’s largest and most diversified health care product makers, with total projected 1998 revenue of over $23 billion. The company operates in three sectors: consumer products (with brands like Tylenol and Motrin analgesics, Reach toothbrushes, Band-Aid bandages), professional products (contact lenses, surgical instruments, joint replacements), and pharmaceuticals (including cancer treatment, antihistamines, and oral contraceptives). Johnson and Johnson (J&J) is trading within the Drug Industry at a relatively low P/E of 31 and its EPS growth rate is at a modest 11.3%, but is expected to increase for the next year and into the future. Also, J&J is expecting approval from the FDA on new lines of drugs dealing with heart disease, cancer, and the like and to develop new medical treatments for pain management, allergies, orthopedics, and much more. Furthermore, J&J is posed to profit greatly witthe aging baby-boomer population approaching and passing the retirement age. Hence, with its strong future prospects and historically modest pricing, Johnson and Johnson is a great choice for any investor, especially the conservative one.
While doing research for this project, I came upon J&J through the Merrill Lynch Equity Screen. Because of the gross overvaluation within the stock market, I felt that only stocks with P/E ratios of no more than 35 may be considered. In order to lessen the risk inherent in investing in equities, I narrowed the list down further to large-cap companies with market capitalization of over $100 billion and whose Beta was less than 1.5. In order to ensure financial strength and shareholder value I included these additional criteria: ROE over 15%, Operating Margin over 10%, Long Term Debt/Equity no more than 1, EPS growth over 10%, and some dividend. Of the companies left, I excluded Exxon because of the recent severe drop in oil prices; as well as IBM, Merck, and Proctor and Gamble because the price of each seem to have hit a top with decreasing trading volume, indicating either a leveling off of the price or a possible drop. Thus, I chose Johnson and Johnson.
Johnson and Johnson has $22.6 billion in sales and is the world’s most comprehensive and broadly-based manufacturer of health care products, as well as a provider of related services, for the consumer, pharmaceutical and professional markets. Johnson and Johnson has 90,000 employees and 180 operating companies in 51 countries around the world, selling products in more than 175 countries.
At $79.81 per share, J&J is trading at a multiplier of 30.5. According to the New York Times, within the past 52 weeks JNJ has traded as low as $63.38 to a high of $89.75. Its EPS growth for the current year is 10.8%, and the EPS growth for the next year is projected to be 11.4%, according to Merrill Lynch Industry Analyst Kelly L. Shaughnessy. This indicates that not only are the Earnings Per Share increasing, they are doing so at a geometric pace, which is as important as the earnings growth itself. Using the 1997 Annual Report for J&J, the company’s PEG (P/E ratio divided by EPS growth rate) is 2.1, meaning that the company may be overvalued. However, it is much less than the 2.8 of Procter & Gamble, 4.4 of Pfizer and Merck’s 2.3. In addition, Merck has P/E ratio of over 37 and Pfizer’s is a staggering 67.24. J&J’s P/E ratio of 31 seems much more attractive to the investor, especially when also compared to the P/E ration