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Research and Analysis Paper 3:  As a new junior analyst for your firm, your first assignment is to research, analyze, and value Johnson & Johnson stock (NYSE listed).  Your boss recommends determining prices based on both the discounted cash flow method and comparable P/E ratio method.  You are concerned about your boss’s recommendation because your Corporate Finance professor explained that these two valuation methods can result in widely differing estimates when using real data. You are hoping the two methods will reach similar prices. Good luck with that!

Your assignment is:

  1. Find      and download the Johnson & Johnson 2019 Annual Report including Form      10-K for fiscal year ending December 29, 2019.
  2. Go to      Reuters ( and      enter the symbol for Johnson & Johnson (JNJ) in the search box at the      top of the web page (select Johnson & Johnson JNJ).  From the      Reuters website collect the following information (you should be able to      find this in the free sections) and enter it into an Excel spreadsheet:
    1. The       current stock price (last trade – upper left of page)
    2. The       EPS (TTM)
    3. The       number of shares outstanding
    4. The       Industry PE Ratio (TTM) – you may need to look elsewhere for this.
  3. From      the Key Metrics tab scroll down to find the Revenue Growth Rate (5Y),      enter the number in your spreadsheet.
  4. Go to      Morningstar (      and enter “JNJ” into the “Search Quotes and Site” box. Select Johnson      & Johnson under the U.S. Securities section.  Under      “Financials” click Income Statement.  Copy and paste (or      use “Export to Excel to create anew file) the most recent three years      (2017-2019) of income statements into a new worksheet in your existing      Excel file.  Repeat this for the balance sheets and the cash flow      statements for Johnson & Johnson.  Keep (or copy) all the      different financial statement data in the same Excel worksheet NOTE: Make      sure you are collecting the Annual data, NOT the Quarterly data.
  5. To      determine the stock value using the discounted cash flow method:
    1. Forecast       the free cash flows.  Start by using the historical data from the       financial statements downloaded from Morningstar to compute the       three-year average of the following ratios:
      1. EBIT/Sales
      2. Tax        Rate (income tax expense/income before sales)
      3. Property,        plant & equipment/Sales
      4. Depreciation/property,        plant & equipment
      5. Net        working capital/sales
    2. Create       an empty timeline for the next five years
    3. Forecast       future sales based on the most recent year’s total revenue growing at the       LT growth rate (5Y average) from Reuters for the first five years of the       forecast.
    4. Use       the average ratios from step 5. a. above to forecast EBIT, property plant       & equipment, depreciation, and net working capital for the next five       years.
    5. Forecast       the the free cash flow for the next five years using Eq. 10.2 from the       text (Section 10.1 in text).
    6. Determine       the horizon enterprise value for year 5 using Eq. 10.6 and a long-term       growth rate of 4% and a cost of capital of 11% for JNJ.
    7. Determine       the enterprise value of the firm as the present value of the free cash       flows.
    8. Determine       the stock price using Eq. 10.4. Note: your enterprise value is in       thousands of dollars and the number of shares outstanding Is in billions.
  6. To      calculate an estimate of the JNJ price based on a comparable P/E Ratio,      multiply the industry average P/E ratio by JNJ EPS.
  7. Compare      the stock values from both methods to the actual stock price. 

Submit a two-page double spaced paper summarizing for your boss your analysis and valuation with a few brief summary exhibits explaining how your analysis and outlook are quantified in your valuation model.  Would you recommend investing in the company? Why or why not?

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