Johnson Financial Analysis

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Image 3: Stock Price and Trading Volume of Johnson and Johnson Stock Source: Nasdaq The Johnson and Johnson stock price has been growing constantly in last year. In September 2015 the price was around 110 US dollars and currently the price is over 125 US dollars. In the trading volume chart there are two peaks that are related in time with downs on the stock price of Johnson and Johnson. Hence, there is a correlation between the volume of trading of the stock and the failing of the price. In the last year the price of the stock increased 13.64%, which is a big number compering with the 7% in this industry. (Global Life Science Outlook, Moving Forward with Cautious Optimism, 2016) Table 1: Changes in the Johnson and Johnson Stock Price Period Moving …show more content…

The higher P/E ratio of JNJ is not favorable compared with the average industry. The dollar for current earnings is higher in Johnson and Johnson case, making the investment less attractive for investors. On the other hand, the P/E ratio of JNJ in a mature industry like pharmaceutical where the investment risks are low is still interesting for investors. The low P/E ratio comparing to JNJ peers could be motivated by the big amount of money that the company invested in research and development and also in the acquisition of other companies like Vogue International. (Valuation Ratios, 2016) Price to Book Ratio The price to book ratio of Johnson and Johnson is 4.07, higher than the average of pharmaceutical industry 3.89. The big number reflects how the market interpreted the relationship between JNJ required rate of return and the actual rate of return of the company. The main problem of using the P/B ratio for companies like JNJ is that the book value does not count some intangible assets such brand recognition or patents of the company, affecting the final investment decision. In the case of JNJ, the number of patents, such as Remicade drugs, that the company owns is quite high. The value of this intellectual rights are not incorporated in the price to book ratio. Moreover, the brand image of JNJ products is superior as the image of the competitors and this value is not reflected in …show more content…

The Gordon model is more accruable because utilizes dividend information from the previous year and the current price of the stock, therefore the market movements are captured in the stock price. Both dividend growth rates are optimistic. The main goal of the dividend discount model is to calculate if the present value of the stock company is overpriced or underpriced, hence, the present value of the future dividend is a good calculus. Johnson and Johnson present value of the future dividends is 100.68. On the other hand, the current value of the JNJ stock is 125.23, indicating that the current stock price is overvalued. In addition, the price per share future using the Gordon model is 64.07 indicating once again the current price of the Johnson and Johnson stock is overvalued. The present value of the stock needs to be carefully interpreted because the interpretation of a stock worth the sum of all its future dividend payments, discounted back to their present value does not count market sentiments, financial decisions or cyclical

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