Johnson and Johnson (JNJ) Financial Performance Analysis

Posted: August 25th, 2021

Johnson and Johnson (JNJ) Financial Performance Analysis

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Johnson and Johnson (JNJ) Financial Performance Analysis

Background

JNJ was established about 120 years ago. It is an American based multinational company operating several branches across the world. The company operates as a group with over 275 companies in over 60 countries globally. It is estimated to have an employee pool of over 128,750 people. It is headquartered in New Brunswick, New Jersey, USA. It is amongst the largest and diverse manufacturers and suppliers of medical and diagnostic equipment. It is also the sixth-largest producer of biologics, pharmaceuticals, and consumer health. Besides, the company has expanded into major and competitive global markets such as China and Australia, which has increased the creation of market opportunities particularly due to growing markets in the ventured economies. The financial performance for the year 2018 was excellent. The company achieved great results. The most notable performance was exhibited in the pharmaceutical sector as the company continued to gain strength among its key brands especially for the over the-counter medicine. Further, advances in technology were great during the year. For instance, the Synthase Inc. brands was incorporated in the Diagnostic Business and Medical Devices. The performance was also boosted by increased efficiency and provision of solutions for the international healthcare market that further bolstered the company growth. Globally, the company sales revenues for 2017 and 2018 amounted to USD 76.3 billion and USD 81.5 billion (Johnson & Johnson, 2018), respectively. According to 2018 performance;

• Pharmaceuticals sales accounted for 43% of the aggregate revenues, coupled with 13% operational growth (Johnson & Johnson, 2018).
• The consumer healthcare segment contributed 20% of total revenues and operational growth of 3.2% (Johnson & Johnson, 2018).
• The Diagnostic and Medical Devices contributed 37% of total revenue sales and reported an operational growth of 6.2% (Johnson & Johnson, 2018).

            The company’s exemplary performance is also attributed to continued adherence to strong business ethics, and recognition of the customer needs. The company also appreciates the need for social responsibility and it ensures that the community is considered in its operations. Besides, the company has continued to upgrade and ensure that its employees acquire the most current technical skills and experience to support and withstand the challenges of market dynamics.

Diversity in Product Line

The company has divided its businesses into three main segments, namely, Medical Devices and Diagnostics, Consumer Products and Pharmaceuticals. According to the 2018 financial performance, the sectors contributed, 37%, 20% and 43% respectively on total revenues. The consumer section offers products such as oral care, skincare, women’s health and baby care. It also provides Stayfree and over the counter pharmaceutical as well as wellness and nutritional products. The pharmaceutical products vary from anti-infective gastrointestinal, immunology, hematology and contraceptives, among others, related to the same. Products under the Medical Devices and Diagnostics Segment are in a wide range. Professionals for general surgery, orthopedic, cardiovascular surgery, and diagnosis, as well as glucose monitoring, utilize most of the products under this category.

The subsequent sections of the paper conduct a financial analysis to ascertain the performance of the company in the past two years, taking a case of 2017 and 2018 financial years. The focus is on the financial statements, stock performance and comparison of the company among its competitors in the market through evaluation of the company stock performance against the S & P 500.

Financial Performance Analysis

Income Statement

The company income statement gives information about the financial performance of business activities over two years. It is used in this case because it helps communicate the amount of revenues that were generated during the period and the associated costs in attaining the reported revenues. Figure 1 below summaries the revenue performance for 2017 and 2018.

Figure 1: Sales Revenue Performance

In figure 1, both Johnson & Johnson’s sales to customers and operating earnings increased over the period from 2017 to 2018. Similarly, earnings before the provision of taxes on income slightly increased over the same period. As a result, the net earnings for the company increased over the period since 2018 reports a higher value than 2017.  The high performance can be attributed to increased marketing of the company products and the enforcement of President Trump’s trade restriction policies, which reduced competition from other products from outside the US boundaries. 

Liability and Stock Equity Performance

A balance sheet is to provide information beneficial for analysts, creditors, and investors to understand the company assets and the principal sources of capital, that is, the liabilities and equities. Usually, it gives details about the capacity of the future earnings of the company assets and any indication of the cash flows, which may be acquired from the inventories and receivables. Liabilities are the obligations of the company’s past operation costs that are expected to give yield to the outflow of the economic benefits from the business. Figure 2 below is a summary of the company’s liabilities and stock equity performance in the year 2017 and 2019.

Figure 2: Liability & Stock’s Equity Performance

Figure 3: Shareholder’s Equity (2018)

Figure 4: Shareholder’s Equity (2017)

According to figure 2 above, the company’s current liabilities increased from 2017 to 2018, while the non-currently liabilities reduced over the same period. Generally, there wasa reduction in the company’s total liabilities over the period (Appendix 2). Further, the examination of shareholder’s equity reveals that there was a general reduction from 2017 to 2019. In 2017, the shareholder’s equity was $60,160 million, while in 2018, it reduced to 59,752 million, representing a 0.34% drop. Figures 3 and 4 reveals that the retained earnings decreased drastically from 68% in 2017 to 66.8%. However, the common stock increased from 21.1% to 21.6%. The increase could be attributed to interest rate cuts and change in public speculation due to the ongoing Brexit debate that affected stock prices. However, a reduction in retained earnings as a result of the ongoing war between the US and China that drastically affected the company’s Chinese market.

Price to Earnings Performance (P/E Ratio)

Table 1 below summarizes the company’s P/E performance over the 2017 to 2018 period

	Dec 30, 2018	Dec 31, 2017
No. shares of common stock outstanding	2,663,138,579	2,682,901,553
Selected Financial Data (US$)
Net earnings (in millions)	15,297	1,300
Earnings per share (EPS)	5.74	0.48
Share price	136.35	129.91
Valuation Ratio
P/E ratio	23.75	270.65

Table 1: P/E performance

The number of company shares were 2.663 billion in 2018while in 2017; the company reported 2.683 billion shares. The data shows a drop in shares between 2017 and 2018. Accordingly, the price per earnings was adversely affected wherein 2017; the price per earning was the US $ 270.65 but dropped to the US $ 23.75 in 2018. However, the share price remained almost stable, recording an increase of 2.42% from the US $ 129.91 to the US $ 136.35 in 2018. Despite the increase, the value of the share reduced. Mostly, this was due to reduced market share because of the competitive global market. However, technological breakthroughs, particularly in the development of new cancer screening machines in 2017, attracted speculators resulting in an increase in share price in the year 2018. Besides, net earnings per share increased from the US $1,300 to the US $ 15, 297, which is attributed to the same factors in the global market.

(P/E Ratio) Comparison to Competitors

Figure 5 below shows the company’s price-earnings per share compared to its key competitors in the industry

Figure 5: P/E Ratio comparison to competitors

The 2018 and 2017 performance about competitors shows that Johnson & Johnson is an average performer in terms of the price to earnings. The compared it outperformed by its main competitors such as Abbot Laboratories, Eli Lily & Co and Merck & Co. Inc. in the year 2018. Despite exhibiting exemplary performance in 2017, Johnson & Johnson’s price to earnings per share remained behind its crucial competitor, Abbott Laboratories.The company was expected to improve on the same trend released in 2017; however, due to the Trump Administration that is characterized by strict protective policies, many investors seemed to shy from investing in the US stock market. Hence, this has continued to undermine the company’s share price.

P/E Ratio Comparison to HealthCare Industry

Figure 6: P/E Ratio Comparison to Industry

The graph under figure 6 above shows the company’s price to earnings per share over ten years. From the analysis, it can be shown that Johnson & Johnson began in 2005 with a low rating, although level with the industry. The company steadily grew the value of its share for over seven years. The value of the share reached its peak in the mid – 2017 and drastically dropped to the lowest in 2018. The drop in the value of the share could be attributed to various economic and political factors, including the Brexit debates and the restrictive policies being implemented by President Trump. The policies have affected the attractiveness of the company share in the global market as most investors shy away due to fear of the unknown. Similarly, Brexit strategies have affected the company share particularly in the UK market. Also, the increasing rate of unemployment has hampered on the ability of most Americans to have disposable income that they could direct to saving, thus reducing the demand of the share, hence its value.

Capital Asset Pricing Model (CAPM)

The model is critical in determining the risk of the asset. It compares the relationship between the expected return and the attendant risks of an investment. In this assessment, the rates of return and the systematic risk estimation are used to evaluate Johnson & Johnson’s capital risks. A period of 60 months is considered in the evaluation.

Johnson & Johnson versus Standard & Poor’s 500 Comparison

Figure 7: Johnson & Johnson versus S & P 500

The analysis reveals that the trend in the company’s share price about the market has been steadily increasing as ascertain for the past 60 months (See Excel CAPM Analysis). The trend is despite the economic challenges that the company encountered in 2018, whichtended to slump the overall share price.

Rates of Return Analysis

The rates of return analysis are exhibited in table 2 below. The analysis is intended to ascertain the value assigned to the share, which would guarantee a risk-free return.

	Johnson & Johnson (JNJ)	Standard & Poor’s 500 (S&P 500)
	Price(JNJ, t1)	R(JNJ, t3)	Price(S&P 500, t)	R(S&P 500, t)
Average:		0.95%		2.25%
Standard deviation:		3.92%		3.13%

Table 2: Rates of return

The average rate of return for Johnson & Johnson is estimated at 0.95%, while that of the industry is 2.25%. The report implies that the company is at a higher risk for investment compared to the prevalent risk in the industry. Investors are likely to incur a loss on the investment or acquire a lower return than it is in the industry.

Systematic Risk Evaluation

The metric uses the beta estimate to measure the volatility of the stock concerning the general market. The beta denotes market fluctuations subject to economic conditions. The following table summarizes the risk state of the company stock compared to the market.

Systematic risk (β) estimation	Rates
Variance(JNJ)	15.35
Variance(S&P 500)	9.77
Covariance(JNJ, S&P 500)	7.04
Correlation coefficient(JNJ, S&P 500)	0.57
β(JNJ)	0.72
α(JNJ)	0.0050

Table 3: Systematic Risk Evaluation

JNJ risk evaluation reveals that the company stocks are likely to fluctuate at the rate of 0.72% compared to 0.005% of the industry. Therefore, it implies that the stocks of the company are riskier to invest in than the industry.

References

Johnson & Johnson (2018), Our Company: 2018 Annual Report, {Online}, Available at: https://www.stock-analysis-on.net/NYSE/Company/Johnson-Johnson

Appendices

Appendix 1: Income Statement

Johnson & Johnson
Consolidated Income Statement
US$ in millions
	Dec 30, 2018	Dec 31, 2017
Sales to customers	81,581	76,450
Cost of products sold	(27,091)	(25,354)
Gross profit	54,490	51,096
Selling, marketing and administrative expenses	(22,540)	(21,420)
Research and development expense	(10,775)	(10,554)
In-process research and development	(1,126)	(408)
Restructuring	(251)	(309)
Operating earnings	19,798	18,405
Interest income	611	385
Interest expense, net of portion capitalized	(1,005)	(934)
Other income (expense), net	(1,405)	(183)
Earnings before provision for taxes on income	17,999	17,673
Provision for taxes on income	(2,702)	(16,373)
Net earnings	15,297	1,300

Source: Johnson & Johnson, 2018 Report

Appendix 2: Consolidated Balance Sheet; Assets

Johnson & Johnson
Consolidated Balance Sheet: Assets
US$ in millions
	Dec 30, 2018	Dec 31, 2017
Cash and cash equivalents	18,107	17,824
Marketable securities	1,580	472
Accounts receivable trade, less the allowances for doubtful accounts	14,098	13,490
Inventories	8,599	8,765
Deferred taxes on income	—	—
Prepaid expenses and other receivables	2,699	2,537
Assets held for sale	950	—
Current assets	46,033	43,088
Property, plant and equipment, net	17,035	17,005
Intangible assets, net	47,611	53,228
Goodwill	30,453	31,906
Deferred taxes on income	7,640	7,105
Other assets	4,182	4,971
Non-current assets	106,921	114,215
Total assets	152,954	157,303

Source: Johnson & Johnson, 2018 Report

Appendix 3: Consolidated Balance Sheet; Liabilities and Shareholder’s Equity

Johnson & Johnson
Consolidated Balance Sheet: Liabilities and Stockholders’ Equity
US$ in millions
	Dec 30, 2018	Dec 31, 2017
Loans and notes payable	2,796	3,906
Accounts payable	7,537	7,310
Accrued liabilities	7,601	7,304
Accrued rebates, returns and promotions	9,380	7,210
Accrued compensation and employee related obligations	3,098	2,953
Accrued taxes on income	818	1,854
Current liabilities	31,230	30,537
Long-term debt, excluding current portion	27,684	30,675
Deferred taxes on income	7,506	8,368
Employee related obligations	9,951	10,074
Long-term taxes payable	8,242	8,472
Other liabilities	8,589	9,017
Non-current liabilities	61,972	66,606
Total liabilities	93,202	97,143
Preferred stock, without par value, unissued	—	—
Common stock, par value $1.00 per share	3,120	3,120
Accumulated other comprehensive loss	(15,222)	(13,199)
Retained earnings	106,216	101,793
Common stock held in treasury, at cost	(34,362)	(31,554)
Shareholders’ equity	59,752	60,160
Total liabilities and shareholders’ equity	152,954	157,303

Source: Johnson & Johnson, 2018 Report