Valuation models predict stock value of $125.71Weights 0.5

FCFELow $ 93.56 High $ 189.45

Johnson & JohnsonNYSE ticker: JNJRecommendation:HOLD

JOHNSON & JOHNSON Stock evaluation byGenevieve Kupritz &Anders LudvigsenGenevieve Kupritz

Company OverviewJohnson & Johnson and its 265 subsidiaries operate in the Healthcare sector within the drug manufacturers sector worldwide. Johnson & Johnson is separate into three segments: Consumer Health (18%), Medical Devices (36%), and Pharmaceutical (46%).

Rating: HoldPrice Target: $125.71Current Price: $117.98Upside: 6.55 %

Date: 10-13-2016

Why we like this stock: • Earnings have grown for 30 consecutive years • Dividends have increased for 52 consecutive years• Outperformed the S&P 500 with a smaller beta (less risk than the market) • Diversified company with reduced risk

Risk factors: •Political factors can change the environment in the industry, decreasing growth and earnings•82% of JNJ’s revenue sources could potentially be affected by healthcare reforms•Opportunity provided by the 6.5% upside < short-term increase in risk•Most analysts recommend Hold (JNJ target spread of $104 -$144.00, mean= $126.58)

Conclusion: Our financial analysis argues that the stock is slightly overvalued where our stock valuation models find the stock to be undervalued. Factoring in the political risk, we conclude that a HOLD position is ideal as time being.

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Stock highlights JNJ52 Week High 126.0752 Week Low 94.12Beta .75PE 21.14PEG 3.79Dividend Yield 2.68%Market Cap 322.75B

BEPS 5.37Book Value per share

26.47ROA 10.95 %ROE 20.70%Future 5 year growth e

6.01%

1. Business Overview Johnson & Johnson (JNJ) and its subsidiaries operate in the Healthcare sector within the drug manufacturers sector. Although JNJ is based in New Brunswick, New Jersey, it has grown significantly since it was first founded in 1885. Today, JNJ and its subsidiaries develop, manufacture, and sell numerous products around the globe. JNJ’s operations can be divided into three divisions: Medical Devices, Consumer Healthcare, and Pharmaceutical. Today, JNJ and its subsidiaries comprises more than 265 companies across more than 60 countries. JNJ boasts sales of $70.24 Billion and a market cap of $312.6 billion as of May 2016. Forbes’ considers JNJ to be “the world’s most comprehensive medical devices business” and is the largest health care business in the world. These statements are supported by numerous rankings. JNJ is the world’s sixth-largest consumer health company, the world’s fifth-largest pharmaceuticals company, and the world’s sixth-largest biologics company. JNJ’s earnings have grown for 30 consecutive years all while increasing their dividends for 52 consecutive years. JNJ is also the least volatile of any of their healthcare dividend providing counterparts and weathered both of the recent recessions extremely well. JNJ has a promising macroeconomic outlook as the ageing global population continues to grow.

Economic outlookThe global ageing population shown in figure 2 and 3 provides a favorable economic outlook for Johnson & Johnson as demand for healthcare goods will rise as the average global life expectancy continues to grow. Figure 4 depicts the rising healthcare expenditures associated with older American citizens. Although the healthcare market is likely to experience some amount of increased volatility due to changes in Obama Care Figure 4 also shows that spending in healthcare will still increase as Americans age despite the availability of a public option (depicted as Medicaid for Americans age 65 and older).

Figure 2, Global population living longer

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Figure 3: Percentage Change in the world’s population by age: 2010-2050

Source: https://www.nia.nih.gov/research/publication/global-health-and-aging/living-longer

Figure 4: Mean and Median Expenses for persons with Healthcare expenses by age and insurance status, 2011

Source: https://meps.ahrq.gov/data_files/publications/st425/stat425.shtml

Political outlookUnfortunately for JNJ, the overall economic outlook is of relatively less importance than that of the overall political outlook. Regardless of who wins the 2016 presidential election JNJ’s pharmaceutical division is likely to take a hit. Both Hillary Clinton and Donald Trump plan to increase pharmaceutical price transparency, to utilize the large number of Medicare customers as a bargaining chip in order to negotiate for lower pharmaceutical prices, and ease drug import restrictions. Hillary Clinton plans diverge from Trumps in that she plans to reduce the biologic exclusivity rights of pharmaceutical companies from 12 to 5 years. All of the above mentioned changes would increase the intensity of competition between brand name American pharmaceutical companies and their foreign and domestic generic counterparts thus likely decreasing the profitability of American brand name pharmaceutical companies. Although the effects of a Donald Trump

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presidency are expected to be less severe than that of a Hillary Clinton presidency due to Donald Trump’s plan repeal the ACA pharmaceutical price regulations and drug rebate requirements it is currently more likely that Hillary Clinton will become president based on the New York Times Upshot’s election model.

Medical Devices DivisionJNJ’s Medical Devices division accounted for 36% of JNJ’s 2015 company revenue. This division produces goods primarily use by health care professionals practicing medicine in the orthopedics, cardiovascular disease, vison care, neurovascular, infection prevention, surgery, diabetes care, sports medicine, and aesthetics. This segment is comprised of our Global Medical Solutions, Global Orthopedics and Global Surgery Groups. JNJ holds just shy of 54,000 international and domestic patents. Unfortunately, JNJ’s medical device division is the JNJ’s worst performing division. At the start of 2016 JNJ declared it would reduce the division’s global workforce by 4%-6% by 2018 and plans to use the $1 billion dollars in annual savings to focus on more profitable and innovative products. This is likely a smart move for the more a century old JNJ in that their products introduced over the past 5 years account for just over 30% of the segments sales.

Consumer Products DivisionJNJ’s Consumer division accounts for approximately 18% of the company’s revenue as of 2015. It is primarily focused oral care, skin care, and baby care products. Skincare, the largest of all product segments contributing approximately a quarter of total division sales and Baby care, the second largest of all product segments contributing approximately a fifth of total division sales of total segment sales for 4Q15, both experienced continued gains.Source: http://marketrealist.com/2016/01/johnson-johnsons-4q15-segment-segment-performance/

Pharmaceutical Division JNJ’s Pharmaceutical division is the largest and most diversified division and accounts for approximately 46% JNJ’s company revenue as of 2015. This division focuses on infectious disease, Immunology, oncology, Neuroscience, and Infectious Disease. As of 2013 Immunology products Remicade and Simponi produced 29% of the division’s and 11.3% of JNJ’s total revenues. Source: http://marketrealist.com/2016/01/johnson-johnsons-4q15-segment-segment-performance/

Figure 5, Pharmaceutical spending per capita is expected to grow from 2013-2018

Source:https://www.imshealth.com/files/web/IMSH%20Institute/Reports/Global%20Outlook%20for%20Medicines%20Through%202018/IHII_Global_Outlook_for_Meds_through_2018_Exhibits_Full.pdf

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Management The Executive Committee of Johnson & Johnson is the primary management group in charge of the operations and distribution of JNJ’s resources. The committee supervises and directs the activities of JNJ’s three divisions: Consumer, Pharmaceuticals and Medical Devices. Because each segment contains numerous subsidiaries worldwide, each subsidiary is predominately governed by citizens of the country in which it is located. The Executive Committee is comprised of Dominic J. Caruso, Dr. Peter M. Fasolo, Alex Gorsky, Sandra E. Peterson Paulus Stoffels, and Michael H. Ullmann. It should be noted that JNJ’s leadership team has change relatively little over the past 15 years and that no one person or executive committee member owns a substantial portion of JNJ. Thus we do not consider JNJ’s management a substantial risk to investors.

Overview for Drug Manufacturer Major IndustryThe Drug Manufacturer Major Industry is a combination of generic and brand name drug producers. The Generic drug producers offer lower risk in return for lower returns while the name brand drug producers offer higher potential returns accompanied by more risk. This is especially true for relatively small pharmaceutical companies that do not have the same luxury that JNJ has of diversifying their risk across several different drugs. Because JNJ focuses on producing new drugs it is considerably more risky (beta of .72) than the Drug Manufacturer Major industry (beta of .34) which accounts for both generic and brand name drug producers. This being said, when JNJ is compared to name brand competitors within the industry such as Pfizer (beta of 1.14), JNJ is less risky. Because JNJ has so many products diversified across so many segments and divisions JNJ does not dominate all products in any one segment but instead is a major player in many segments across many products. This is in stark comparison to most of JNJ’s competitors whom are specialized in one particular segment or product and dominate an individual product or segment. JNJ’s highly diversified strategy likely contributes to their long run stability and aides in combating individual sharp declines in a particular product or segment driven by economic factors or product recalls. Although our analysis show JNJ to be an excellent choice for investors within the Drug Manufacturer Major industry the current political situation effect’s on the industry as a while must be considered. The changes that the presidential candidates are proposing will likely have uneven negative industry effects with name brand drug producers being more severely impacted.

2. Financial Analysis and ManagementSince JNJ operates in several (related) sectors, the financial analysis will be benchmarked mainly towards JNJ’s top competitors in the pharmaceutical and medical devise division, since it make up 82% of total sales. The main competitors identified are Eli Lilly & co (LLY), Pfizer Inc. (PFE), Bristol Myers-Squibb Co (BMY), and Merck & Co (MRK). Procter & Gamble Co. (PG) has been included to represent the Consumer products division. Morningstar, Yahoo Finance and MSN all places JNJ in the “Drug Manufacturers – Major” industry, so these numbers will also be included (IND) together with S&P500, when relevant.

EarningsTable 1 shows growth rates in %, YOY and 5 year annual averages of sales, net income and dividends. JNJ’s sales YOY are above industry average but underperforming compared to LLY, PFE and BMY. This can be explained by the fact that JNJ’s total 2015 revenue was 70 billion dollars, compared to LLY 19.96 billon, PFE 48.85 and BMY 16.65 billion dollars. Considering JNJ’s size and diversified portfolio, large yearly growth rates are not expected. It is therefore more relevant to look at the 5-year annual average sales growth. Here, JNJ outperforms their identified competitors, but slightly underperforms the industry average. JNJ’s 5 years steady sales growth is positive and indicates a healthy growing company, which is important for long-term investments. The sales numbers are supported by positive net income, where both the YOY and 5-year annual growth outperform the industry average. Looking at the industry average, it is worrying that the net income numbers are negative. This can be attributed to external factors such as regulation, lawsuits and

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increased competition in the drug manufacturing industry. Internal factors such as increased R&D can decrease the net income but may pay off in the long run. Therefore it is not guaranteed that JNJ will remain above the industry average in the future, but it is a good indicator that JNJ are currently outperforming their competitors. JNJ’s dividends are also acceptable when compared to their identified competitors. Overall, it can be concluded that JNJ’s sales and net income is increasing. Their rates does not indicate any extraordinary future gains or losses, which again argues for JNJ as a low risk long-term investment.

Table 1

Growth Rates % JNJ LLY PFE BMY MRK PGSales (YOY) 3.9 8.6 10.9 17 0.6 -2.7Net Income (YOY) 5.6 0.7 -23.5 -21.9 -62.7 12.6Sales (5-Yr. Annual Avg.) 2.62 -2.86 -6.35 -3.2 -3 -4.58

Source: Microsoft MSN and Yahoo Finance.

Price ratiosJNJ’s P/E ratio is lower than the industry and the identified competitors, which indicate that JNJ is currently trading relatively cheaper/at a better value. This is positive, but when looking at the PEG ratio, JNJ is much higher than most of the competitors, suggesting investors are paying a premium with no large expected future growth. The contradicting ratios can be explained by the fact that the P/E ratio calculation does not include future expected growth of the company, where the PEG ratio expands the P/E ratio by factoring growth into the calculations. This also correlates with the findings in the earnings sections, arguing that JNJ is not expected to experience tremendous growth in the future, but just enough to sustain a reliable income. Looking at the price/sales, price/cash flow and price/book ratios, JNJ’s ratios are slightly higher than the industry; once again indicating the stock is trading at a premium. Its ratios are fairly close to the industry and therefore does not indicate anything significant, but comparing them to the S&P 500, it is a strong indicator of an overvalued stock.

Table 2

Price ratios

Price Ratios JNJ LLY PFE BMY MRK PG Industry

Source: Microsoft MSN and Yahoo Finance.

Profit MarginsAs seen in the table 3, JNJ current margins are some of the best in the industry. JNJ’s gross margin is about average, the pre-tax margin is outperforming the industry and competitors, and most important, the net profit margin is the highest of the selected competitors and outperforms the industry. JNJ is also close to the 5 year gross margin 5 year industry average but again, more importantly, outperforms the industry net profit margin 5 year industry average, indicating a healthy company. It should be noted that JNJ’s current year net profit margin is slightly lower than their 5-year average. The same trend is occurring in the industry, so JNJ is still outperforming its competitors within its industry.

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Table 3Profit Margins

Profit Margins % JNJ LLY PFE BMY MRK PG Industry Gross Margin 69.58 73.72 77.71 75.55 62.58 49.6 70.1Pre-Tax Margin 25.51 14.58 15.9 21.84 16.08 20.47 18.85

Source: Microsoft MSN and Yahoo Finance.

Debt and EquityTable 4 displays key debt and equity ratios and compares them to their competitors and the industry average. JNJ has a lower debt/equity ratio than that of the industry and their competitors, which implies that JNJ is finically stable and less risky (considering the low amount of debt that is used to finance their assets). JNJ’s current ratio is also much higher than competitors and industry average, indicating JNJ will not have any problems paying their future short-term obligations. The interest coverage is also much higher, which confirms that their debt expenses (interest rates) can easily be covered by the generated revenues. JNJ’s leverage ratio is slightly lower than the industry and competitors, once again, indicating that JNJ does not grow as quickly as the other companies within the industry. JNJ’s book value / share, is higher than the chosen competitors, indicating that JNJ is selling for a premium, most likely due to the strong financial positions and the decreased risk of defaulting on their obligations. It can be concluded that JNJ’s debt ratios are better than their competitors, but it is still important to notice that none of the chosen competitors are in bad shape, when compared to industry averages.

Table 4

Debt and Equity

Financial Health JNJ LLY PFE BMY MRK PG Industry Debt/equity Ratio 0.34 0.59 0.49 0.44 0.55 0.34 0.47Current Ratio 3.08 1.54 1.37 1.56 1.87 1.1 1.72

Source: Morning Star

Industry specific ratiosThe drug manufacturing and pharmaceutical industry rely on large investments in R&D to secure future income. It can take years and millions of dollars in R&D to develop future products. Therefore it is important to evaluate R&D expenditures and return on equity. As seen in table 5, JNJ is currently investing the largest dollar amount in R&D, but this is also expected considering JNJ’s size. It is not enough just to invest in R&D, the investments needs to be efficient and profitable. The return on equity is therefore a good indicator to evaluate the results of the R&D. JNJ’s ROE is outperforming the industry and competitors, proving that JNJ are getting the most value out of their R&D. Looking at R&D margins % of sales, also show that JNJ is able to generate higher sales with less R&D than all of their competitors with the exception of PFE. Something that is not mentioned in the numbers is the fact that JNJ currently have the largest pipeline of new drugs and expect the introduction/filings of 10 new products by 2019. This will aid in future growth.Finally, since JNJ has been identified as a long term, low risk, dividend paying stock, it is also important to examine the dividend payout ratio. This ratio illustrates the ability to payout future dividends. JNJ has one of

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the lowest dividend payout ratios, meaning that JNJ will be more likely to sustain their dividend payout rates. JNJ could also afford to increase the dividend if they wished to do so.

Table 5Net Income (5-Yr. Annual Avg.) 2.9 -13.8 -3.5 -12.8 38.8 -3.4Dividend (5-Yr. Annual Avg.) 2.95 3.43 3.4 2.99 3.47 3.15

Price ratios

Source: Morning Star

Financial analysis conclusion The Financials shown above show that JNJ is overall, fundamentally financially solid. The only major concern is JNJ’s P/E and PEG ratio, which indicates little to no future growth potential. Based on the financials, JNJ may also be slightly overvalued when compared to their competitors. It can be argued that the investors view JNJ as a low risk/low growth dividend stock and therefore are willing to pay a premium for a small steady income. Finally, Chart 1 compares JNJ’s stock returns to the S&P 500 and shows that JNJ has slightly outperformed the S&P, but has also faced growth challenges during the last 3 months. Looking at chart 2, it is clear that JNJ has an on average outperformed the S&P 500. Although JNJ does not highly outperform the S&P 500, it should be noted that JNJ has is 25% less risky (beta = .75) than the market as a whole. It is for this reason as well as the above valuation metrics that we consider JNJ to be a buy for long term more risk adverse investors that are willing to receive lower returns (required rate of 10%), still wish to outperform the market as a whole, but desire less risk than the general market.

Chart 1

1 month 3 months 1 year 3 year 5 year-100

102030405060708090

-2.6 -7.35

18.1926.39

79.86

-1.02-1.56

6.05

21.54

72.92

Performance: JNJ vs. S&P 500

JNJS&P500

Time

% Return

Source: Yahoo Finance

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Chart 2

Source: Yahoo Finance

3.Analysts, Insiders, and Bulletin Boards 19 analysts from yahoofiance.com listed JNJ target valuations ranging from a low of $104 to a high of $144.00 with an average of $126.58 or approximately 7% higher than the JNJ’s current stock price, and 0.7% higher than the target price of $125.71 calculated in the valuation section.

The analysts from www.nasdaq.com and marketwatch.com consider JNJ to be somewhat overweight. Analysts recommend to either buy or hold JNJ stock with a slight preference toward to hold over buy. Analysts from neither site recommend to sell. Along these same lines, Gurufocus from www.nasdaq.com does not believe that JNJ is highly undervalued and thus does not consider JNJ to be a “Super Stock”. First, JNJ’s price/sales ratio is estimated to be 4.57 using the trailing 12-month sales. Because 4.57 >3, JNJ is considered to be more risky than is preferred. Second, Gurufocus recommends companies that have an inflation adjusted EPS growth higher than15% and JNJ’s adjusted EPS growth rate was only 6.70%. Fortunately, JNJ’s Total Debt/ Equity ratio, free cash per share, and three-year average net profit margin are all considered to be acceptable at 34%, 2.72, and 21.12% (21.21%>5% desired average net profit margin over the past three years).

Johnson & Johnson prospects

Pharmaceutical DivisionPharmaceutical prospects are positive for two of JNJ’s future drugs, Sirukmab and Stelara. Currently JNJ’s competitor AbbVie’s Humira is the most effective treatment for numerous autoimmune diseases and generated approximately $14 billion last year in sales. This past September JNJ submitted its own drug sirukmab for FDA approval and its long-term studies to be completed in 2020. Unfortunately the market share won by Sirukmab will have to be shared with its partner GlaxoSmithkline who as of 2011 owns the rights to market Sirukmab in North, Central, and South America. Fortunately, JNJ’s Stelara has already been FDA approved but only as a second-line treatment and thus is not likely significantly affect Humira’s sales. The upside of these new drugs is that the market for them is so large that even the small amount of market

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share earned by Stelara alone in 2015 generated $2.5 billion.

Medical Device DivisionAlthough profitable, JNJ’s medical device segment has underperformed by JNJ’s standards. Analysts believe this is largely due to sluggish economic growth in the US. And the United States as well as rising uncertainty in the healthcare industry driven by the enactment of the Affordable Care Act. This uncertainty has led many to postpone non-urgent surgeries which has dampened demand for many of JNJ’s medical device products. Starting in 2009, JNJ has made the strategic move to transition toward medical devices toward more urgent procedures and more innovative products. This move has led to a series of acquisitions and jettison of several of JNJ’s underperforming subsidiaries. Although the future is somewhat murky, the transition has already generated improvements in sales growth of more than 2.5% in 2016 alone.

Consumer Health DivisionAnalysts consider JNJ’s consumer health products to be predominately inelastic but also one of lower growth and smaller margins especially when compared to the pharmaceutical’s possible margins of 70+%.

4. Valuation models JNJ’s present value target price was calculated to be $125.71, using the following valuation models and weighted averages: FCFE 50%, PE 20%, P/Sales 20% and external valuation 10%. Residual income and Monte Carlo were also calculated, but did not provide reliable results and therefore not included in the weighted averages. The calculations and assumptions made for each model will be explained/illustrated next.

FCFE and 3 stage discount model: This model has the highest weighted average in our valuation since it seems to give the most realistic valuation output. Table 6 shows the FCFE analysis results.

Table 6Johnson & Johnson Current Price =$117.98 Inputs Best Estimate Pessimistic OptimisticCurrent FCFE or Dividend $5.00 $4.50 $5.50Cost of Capital through stage 3 10.00% 11.00% 9.00%Growth in year 1 7.90% 7.11% 8.69%Growth in year 2 6.30% 5.67% 6.93%Growth in year 3 6.88% 6.19% 7.56%Growth in stage 1, starts in year 4 7.45% 6.71% 8.20%Number of periods for stage 1, must be < 20 5 5 5Number of periods for stage 2, must be <20 5 5 5Cost of Capital in stage 3 10.00% 11.00% 9.00%Growth in stage 3 5.00% 5.00% 5.00%OutputValue of first three years $14.25 $12.43 $16.17 Value of stage 1 $21.47 $17.59 $25.97 Value of stage 2 $18.51 $14.14 $24.02 Value of stage 3 $71.39 $44.45 $118.34 Value of stock $125.63 $88.61 $184.49

Value of stock + cash per share $130.58 $93.56 $189.45

Table 7 shows the FCFE calculations and historic values. Here it is important to keep the capital expenditures above depreciation. FCFE also needs to be less than 100%.

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Table 7

FCFE CALC Calculated 2015/12 2014/12Net income = $15,409.00 $15,409.00 $16,323.00

46.80% 46.67% 46.80%

$3,746.00 $3,746.00 $3,895.00

$3,318.00 $3,746.00 $3,895.00

$269.52 $269.52 $269.52

Debt ratio = (default is 5 yr average)Capital Expenditures(default is 5yr average) Depreciation(default is 5 yr average) Change in Working Capital =

Table 8 shows the cost of capital calculations. We argue that we only need a required rate of return of 10% for JNJ since it is a low risk stock (beta=.75).

Table 8

30 year Treasury Yield or similarBeta Equity Risk PremiumCurrent value of CBOE's VIX (ticker is VIX)Current PE ratioCurrent Price/Sales ratio CAPM ESTIMATE

Bond Yield Method

Estimating the Cost of Captial, CAPM and BOND Yield + 5%, Relative Valuations, Using CAPM

External valuationBy using online valuation resources it is possible to collect a range of external valuations. For example, Valuepro estimates JNJ stock price to be worth $127.21 and the average estimated value from Marketwatch, using 26 estimates is $126.56. The average of the external estimations is weighted 10% in the total valuation of JNJ.

Residual Income Model The results from this valuation estimated the JNJ price should be at: $111 low, $118 high and $115 best. These calculations are not included in overall evaluation due to the narrow range.

Relative Valuation ModelsThis valuation is based on earnings and sales where JNJ’s expected stock price for December 17th 2017, is calculated as illustrate in table 9 and 11. The price is then discounted back to the present value at JNJ cost of capital, as seen in table 10 and 12. These estimations are weighted 20% in the total valuation of JNJ.

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Price/Earnings valuationTable 9Date of Estimates 12/17/2017 EPSCurrent Stk. Price $117.98 Pessimistic Expected OptimisticPE $ 6.81 $ 7.11 $ 7.31 Pessimistic 19.55 $ 133.12 $ 138.98 $ 142.89 Expected 21.98 $ 149.68 $ 156.28 $ 160.67 Optimistic 24.41 $ 166.25 $ 173.57 $ 178.46

Table 10Discounted back to present EPS

Years to forecast 1.18 Pessimistic Expected OptimisticPE $ 6.81 $ 7.11 $ 7.31 Pessimistic 19.55 $ 118.95 $ 124.19 $ 127.68 Expected 21.98 $ 133.75 $ 139.64 $ 143.57 Optimistic 24.41 $ 148.55 $ 155.10 $ 159.46

The earnings per share (EPS) was composed from 16 of the latest analysts’ estimates for the year 2016. The estimations fluctuated from a low of $6.67 to a high of $6.72, with an average of $6.69. The current price to earnings ratio (PE) was then used in order to calculate JNJ’s high and low PE ranges were computed by adding and subtracting 11.51%, which is attained by multiplying the current S&P 500 implied volatility (VIX), 15.35%, and company’s beta, 0.75 ( 0.1535 X .75= .1151). This was done in order to attribute for JNJ’s price sensitivity relative to the market’s volatility because PE ratios change in response to both changes in price and earnings but these changes are only reflected quarterly when earnings statements are published. Our model predicts an expected EPS for JNJ to range from a low of $124.19 to a high of $155.10, with an average of $139.64 or 18.36% greater than JNJ’s current stock price of $117.98 and 9.98% greater than the DCF model’s estimated target price of 125.71$. This metric therefore suggests that JNJ’s stock is undervalued.

Price/Sale valuationTable 11Date of Estimates 12/17/2017 Sales/shareCurrent Stk. Price $117.98 Pessimistic Expected OptimisticPrice/Sales $ 26.91 $ 27.27 $ 27.78 Pessimistic 4.04 $ 108.65 $ 110.12 $ 112.18 Expected 4.54 $ 122.17 $ 123.83 $ 126.14 Optimistic 5.04 $ 135.70 $ 137.53 $ 140.10

Table 12Discounted back to present Sales/share

Years to forecast 1.18 Pessimistic Expected OptimisticPrice/Sales $ 26.91 $ 27.27 $ 27.78 Pessimistic 4.04 $ 97.09 $ 98.40 $ 100.24 Expected 4.54 $ 109.17 $ 110.65 $ 112.71 Optimistic 5.04 $ 121.25 $ 122.89 $ 125.19

The current price to sales ratio of 4.54 for JNJ was acquired from Yahoofinance.com and used in the valuation model. The expected revenue of the most recent analysts’ estimates (21 estimates) for 2016 ranges from a low of 71.76B$ to a high of 72.83B$, and had a mean of 72.16B$. The current price/sales ratio was utilized and the high and low ranges for the price/sales were obtained by subtracting and adding 11.51%,

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which was calculated by multiplying S&P 500’s current (VIX) of 15.35% and JNJ’s beta of .75 (.1535 X .75 =.1151). The expected price/sales had range of $101.55 to $120.26, with a mean of $110.65 or 6.02% less than the current price of $117.96 and 13.61 % below the DCF model’s best estimate target price of 125.71$. For this reason this metric suggest that JNJ is overvalued.

Monte Carlo ValuationA Monte Carlo Simulation was used to predict a random variation within a normal distribution of 1000 simulations for numerous hypothetical possible JNJ stock values. The model was based on 1000 repetitions using the revenue growth rate volatility from 2011-2016 (ttm) 5.27%, and net profit margin volatility from 2011-2016 (ttm) of 3.28% and a confidence level of 0.80. The result of this valuation method estimates the intrinsic value of JNJ is between $128.82 and $194.52 with a mean value of $160.32. It should be noted that the Monte Carlo valuation is not included it the total valuation of JNJ, due to the large range and the minimum value that is above the current price.

Combination of valuation modelsThe football field graph (chart 4) depicts the range of JNJ’s stock prices from 6 methods of valuation. It should be noted that each method considers a different set of assumptions that an analyst or investor may not be willing to accept independently from other valuation methods. The average of the valuation methods was taken so that extreme biases would be removed. As shown below, the current price is included in 5 of the 6 models. The target price calculated using the weighted average as shown in table 13. This valuation shows the target price of $125.71 is slightly greater than JNJ’s current stock price of 117.98, which is a buy signal.

Chart 4, football field

52-Week Price Range$40.00 $60.00 $80.00 $100.00 $120.00 $140.00 $160.00 $180.00 $200.00

Current Price

Estimated ValueJohnson & Johnson

Price (dollars)

Table 13

Weights 0.5 0.2FCFE PE

Low $ 93.56 $ 125.63

Looking at the Mondo Carlo Valuation estimates in table 14 and chart 4, 297 of the 1000 possible outcomes resulted in stock prices less than the current price, 187 outcomes resulted in stock prices equal to the current

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price and 514 outcomes resulted in outcomes greater than the current stock price. The standard deviation was 17.68$ and the distribution was slightly skewed to the left (negatively skewed) as the mean 126.03$ < the median 126.16$. This model proposes that JNJ stock is slightly undervalued. We are 80% confident that the true intrinsic value of JNJ is between $103.36 and $148.05.

Table 13 Chart 4

ResultsValuation =$ 125.71

Mean $126.03Median $126.16Standard Deviation $17.68Set Confidence intervalLower limit 10% $103.36Upper limit 90% $148.05Minimum $58.33Maximum $190.31

Technical analysisAfter the extensive section of fundamental analysis used to estimate JNJ’s value, this section will focus strictly on price movements of the stock. Technical analysis is a popular tool to identify what direction the stock is currently moving by looking at historical trends. Simple moving average, Bollinger bonds and the Relative strength index will be used to determine past and current buy/sell signals.

Chart 5 displays JNJ’s 1-year stock price (blue), the relative strength index (yellow), a 50-day simple moving average (green) and a 20-day simple moving average (red). The simple moving average indicates a change in the trend when crossing the stock price. A buy signals is considered when the moving average crosses above the JNJ stock price and a sell signal considered is when the moving average crosses under the stock price. As seen in the chart a correct sell signal was indicated around Jan 1st, a correct buy signal Jan 26th and then the lasts sell signal is at august 16th. The 50 day-moving average can therefore be used to predict the next buy signal, which has not yet happened. This supports the argument about a hold signal since a buy signal looks to be very close.Another moving average strategy is to include a 20-day moving average and then focus on when the long and short term moving average crosses each other. When the short term (20 day) moving average crosses above the long-term (50 days) average, it is a buy signal knows as a “golden cross”. When then short moving average crosses below the longer moving average, it is a sell signal known as “dead cross”. Looking at the trend, this strategy looks to give delayed signals compared to the 50-day strategy, and should therefore not be weighted as important for this stock.Using the RSI with 14 trading days, it is possible to get an indicator of momentum, since it evaluates the strengths of the price performance. The RSI value ranges from 0 to 100, where values of 70 or above indicate that a security is becoming overbought/overvalued where values of 30 or below is commonly interpreted as the stock being oversold/undervalued. As seen in chart 2. JNJ’s current RSI is 46.63, getting close to a buy signal. This correlates with the interpretation of the moving averages. To avoid false signals, some traders use values of 20 and 80. For JNJ, the price is not volatile enough to get event close to these values, and the RSI should therefore not be used separately.

Chart 5

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Monte Carlo Valuation Es-timates

SimulationsCurrent Price

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Source: Yahoo finance

Finally, we will use the Bollinger Band to which is two lines (red and purple), plotted two standard deviations away from a 50 day simple moving average, as seen in chart 6. It is argued that an overbought stock price will be closer the upper band, where an oversold stock will be closer to the lower band. JNJ’s stock is currently close to the lower band, which once again argues for the stock to be oversold, and a small buy signal.

Chart 6

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Source: Yahoo finance

5. ConclusionIn conclusion, our financial analysis argues that the stock is slightly overvalued where the valuation models find the stock to be undervalued. Factoring in the political risk, we conclude that a HOLD position is ideal as time being. We argue that the political outcome of the 2016 presidential election can negatively impact the profitability of the healthcare sector. Due to the uncertainty associated with this year’s election our recommendation is a HOLD position for the JNJ stock. We hold this opinion because the opportunity provided by the slight undervaluation of JNJ at $117.98 when compared to our calculated target price of $125.71 (6.5% upside when rr =10%) is not worth the short-term expected increase in risk in the healthcare sector. However, we view JNJ to be a good potential long-term low-risk investment that could be used to decrease a portfolio’s risk while still generating small returns, if the investor does not find the future political environment an unacceptable risk.

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