Fundamental Analysis of Johnson and Johnson Inc Term Paper

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The Fundamental Analysis of Johnson & Johnson Inc.

(J& J, 2005)

Economic and Market Analysis


Industry Analysis

Company Analysis

Brief History of the Company

Analysis of Capital Asset Pricing Model

Intrinsic Value

Valuation Measures

Trading Information


Awards & Recognition

Our modern business world consists of an extremely competitive global economy where manufactures search for opportunities to strategically reduce costs and increase market share and profitability. Historically, the most often chosen solution for holding down costs was to systematically reduce labor and therefore eliminate the associated costs of labor. In the 1990's for example, many companies chose lay-offs, downsizing or to simply slow manufacturing processes and these types of scenarios consistently headed the 'business section' headlines. In reality, these methodologies were merely attempts to reduce overhead. Manufactures today are finding that labor is now at more of a premium level which entails that it can no longer be reduced without indirectly or directly affecting output capacity, quality and efficiency quotas because manufacturing lines are at a barebones minimum. All of these ideas affect a company's stock and the overall manufacturing process.

This report therefore is a stock analysis of Johnson & Johnson Inc. And their efforts at reducing costs, increasing market share, meeting their shareholders and stakeholders as well as industry expectations while still fulfilling the very high levels of quality demanded by their customers. Johnson & Johnson Inc. has made great strides in divesting itself of unprofitable functions and maintaining high levels of customer support for its many products and associations. Through new acquisitions, novel business strategies and a regular migration to cheaper labor pools, Johnson & Johnson Inc. has become a strong force to be reckoned with in the highly competitive major drugs and healthcare industry.

The Fundamental Analysis of Johnson & Johnson Inc.


The report represents the research and methods used to create a fundamental analysis of Johnson & Johnson Inc. In other words, this report aims to provide insights into the company as well as being a financial analysis report. The report attempted to use a top-down approach for security analysis-content for Johnson & Johnson Inc. which entailed using between five to ten years of data analysis for the company. Basically, this project was nothing more than a detailed security analysis project designed to apply various techniques for evaluating the desirability of a company's common stock. "Johnson & Johnson, through its operating companies, 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 medical devices and diagnostics markets. The more than 200 Johnson & Johnson operating companies employ approximately 111,000 men and women in 57 countries and sell products throughout the world." (J& J, 2005)

A main objective was also to demonstrate familiarization with various tools and techniques that are pertinent in a security's valuation. This report encompassed typically available data to implement the various techniques of analysis and focused on Johnson & Johnson and resurgence in the highly competitive major drug, drug manufacturing and healthcare industries. Trends in these industries have forced companies such as Johnson & Johnson to completely reevaluate the way they will do business today and in the future. The healthcare industry has become an extremely mobile global business that continues to be driven by cheap labor and resources from new and emerging markets in various industrialized and developing countries. Johnson & Johnson has had to reinvent their business and marketing strategies in order to grow and prosper in the twenty-first century and beyond and this report will evaluate the industry, economic and market trends and the company itself to demonstrate whether or not they seem as though they will remain a viable investment opportunity for investors.

Economic and Market Analysis

Understanding economic trends and their ties to stocks is always an important aspect of analysis because of the many correlations between economic indicators and stock prices. On the local and national television news and throughout the global financial media circuits, there have been notices that the United States has been in a mode of steady economic recovery. For example, based on the percentage of change for the real Gross Domestic Product, Consumer Price Index and the S& P. 500, there are good indications of steady growth.

The Gross Domestic Product helps nations monitor what is occurring in their economies. The United States recent eighteen month forecasts for the Gross Domestic Product was increasing at a clip of near two point seven percent (2.7%) annually. This is seems like a good pace until we note that in comparison, the combined first world nation's Gross Domestic Products have been estimated to grow at an even higher pace of over three percent (3%) annually with some new emerging nations doubling that. Thus, all looks well in the sense of economic growth. Also, the ability of corporations to easily pick up and move into cheaper labor havens throughout the Third World was considered to be a good way to boost profits. But, the fact of the matter is that corporate relocations have actually led to more downsizing and corporate restructurings of whole companies.

Thus, this entails higher levels of unemployment and lower earnings throughout the urban communities and the rural farms of the United States. Unemployment was historically localized in small segments of the nation but it has now become both a national and an international problem. "We live in a world so rich that global income is more than $31 trillion a year. In this world, the average person in some countries earns more than $40,000 a year. But in this same world, 2.8 billion people -- more than half the people in developing countries -- live on less than $700 a year. Of these, 1.2 billion earn less than $1 a day." (Chossudovsky, 1998)

There are also many other indications that all is not well. The baby boomer generation is nearing retirement at a time when healthcare, social security and failing retirement funds are at all time highs. The nation is also suffering from mass increases in the trade imbalance. "China accounts for a quarter of the U.S. trade deficit and for one-third of the U.S. deficit in manufactured goods, is the second largest source of U.S. imports after Canada and is America's third largest trading partner as conventionally measured. Despite these facts, the U.S. government does not publish full current account data for China, instead lumping China in with "Other Countries in Asia and Africa." This keeps the magnitude of the problem out of sight." (Roberts, 2004)

Other concerns include the dependence on foreign oil, heightened terroristic activity and more troubling signs out of nations like North Korea, Iraq and other world trouble spots also add concerns and skepticism on the true economic picture and outlook. These concerns are not only for the United States but the entire world. Recent Bush administration announcements that they require increased debt ceiling levels also raises questions regarding the future of government financial obligations and the nations ability to pay its future debt. The current governmental debt ceiling was just over seven trillion dollars and that was reached around October of last year. Obviously a request to raise our nation's debt ceiling is the result of the record budget deficit caused by several natural disasters, the Iraq debacle and multiple tax changes aimed at saving the rich. The United States was already the world's largest debtor nation so a default from any aspect of the nations business or governmental cycles could be devastating to the entire world economy.

Couple these concerns with the fact that the United States dollar has also fallen sharply which could also indicate that there is some real instability in the United States and the world economy. "Since the dollar is, and will likely remain, the unit of value of international transactions, any fluctuation in its parity will have repercussions far beyond the U.S. balance-of-trade picture." (Fatemi) Throughout the European Union for example, the fall of the dollar continues to alter the export markets and has threatened European growth expectations at the same time that they have been busily consuming goods out of Asia. Leaders of the European Union have publicly criticized our Bush Administration for its inherent deficit effect on the world economy.

Add in all new surges for the price of oil and a major economic downturn could be right around the corner. World oil prices continue to hit new all-time highs and demand will always far outstrip supply because oil producing nations have been desperately trying to meet global demand. Any disruptions in the oil supply such as a recent Russian oil tax problem, wars in oil producing nations or something as simple as bad weather could cause critical shortfalls. The United States and China, the number one and two users of crude, recently announced that demand for crude imports could rise as high as another forty percent throughout 2005.

We also must not overlook the effect of interest…[continue]

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