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Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more/most accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of between 0.5 and 1.5. Further information about the beta ratings can be found in the appendix section of this report.
Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more/most accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of between 0.5 and 1.5. Further information about the beta ratings can be found in the appendix section of this report.
==== Risks that Johnson & Johnson is exposed to: ====
Risks Related to Our Business, Industry and Operations:
* The Company’s businesses operate in highly competitive product markets and competitive pressures could adversely affect the Company’s earnings.
* Interruptions and delays in manufacturing operations could adversely affect the Company’s business, sales and reputation
* The Company relies on third parties to manufacture certain of our products. Any failure by or loss of a third party manufacturer could result in delays and increased costs, which may adversely affect our business.
* Counterfeit versions of our products could harm our patients and have a negative impact on our revenues, earnings, reputation and business.
* Global health crises, pandemics, epidemics, or other outbreaks could adversely disrupt or impact certain aspects of the Company’s business, results of operations and financial condition
Risks Related to Government Regulation and Legal Proceedings:
* Global sales in the Company’s Pharmaceutical and MedTech segments may be negatively impacted by healthcare reforms and increasing pricing pressures
* The Company is subject to significant legal proceedings that can result in significant expenses, fines and reputational damage.
* The Company faces significant regulatory scrutiny, which imposes significant compliance costs and exposes the Company to government investigations, legal actions and penalties
* Changes in tax laws or exposures to additional tax liabilities could negatively impact the Company’s operating results.
Risks Related to Our Intellectual Property
* The Company faces increased challenges to intellectual property rights central to its business.
Risks Related to Product Development, Regulatory Approval and Commercialization
* Significant challenges or delays in the Company’s innovation and development of new products, technologies and indications could have an adverse impact on the Company’s long-term success
Risks Related to Financial and Economic Market Conditions:
* The Company faces a variety of financial, economic, legal, social and political risks associated with conducting business internationally.
* Failure to maintain a satisfactory credit rating could adversely affect our liquidity, capital position, borrowing costs and access to capital markets
* The Russia-Ukraine War, and actions taken in response to the Russia-Ukraine War, could adversely affect our business, results of operations or financial condition.
== Financials ==
=== Income Statement ===
{| class="wikitable"
|-
!'''USDm'''
!'''2020'''
!'''2021'''
!'''2022'''
!'''2023E'''
!'''2024E'''
!'''2025E'''
!'''2026E'''
!'''2027E'''
|-
|Assumptions:
|
|
|
|
|
|
|
|
|-
|'''Revenue growth'''
| -
|14%
|1%
|7.5%
|7.5%
|7.5%
|7.5%
|7.5%
|-
|'''Cost of sales % revenues'''
| -
|5%
|4%
|4.5%
|4.5%
|4.5%
|4.5%
|4.5%
|-
|'''Research and Development as % gross  profit'''
| -
|21%
| -1%
|9.9%
|9.9%
|9.9%
|9.9%
|9.9%
|-
|'''General and administrative expenses %  gross profit'''
| -
|12%
|0%
|6.2%
|6.2%
|6.2%
|6.2%
|6.2%
|-
|'''Other operating income as % of gross  profit'''
| -
|300%
| -13%
|143.5%
|143.5%
|143.5%
|143.5%
|143.5%
|-
|'''Pretax Income %'''
| -
|43%
| -9%
|17.2%
|17.2%
|17.2%
|17.2%
|17.2%
|-
|'''Taxes % of profit before tax'''
| -
|6%
|99%
|52.7%
|52.7%
|52.7%
|52.7%
|52.7%
|-
|'''% basic net earning per share'''
|
|42%
| -14%
|14%
|14.0%
|14.0%
|14.0%
|14.0%
|-
|'''% diluted net earning per  share'''
|
|42%
| -14%
|14%
|14%
|14%
|14%
|14%
|-
|'''% average share outstanding  basic'''
|
|0%
|0%
|0%
|0%
|0%
|0%
|0%
|-
|'''% average share outstanding  diluted'''
|
|0%
|0%
|0%
|0%
|0%
|0%
|0%
|-
|
|
|
|
|
|
|
|
|
|-
|'''Total Revenue'''
|                     82,584
|                     93,775
|              94,943
|           102,064
|           109,719
|           117,947
|           126,793
|           136,303
|-
|'''Cost of Sales'''
|                   (28,427)
|                   (29,855)
|            (31,089)
|              (4,593)
|              (4,937)
|              (5,308)
|              (5,706)
|              (6,134)
|-
|'''Gross Profit'''
|                     54,157
|                     63,920
|              63,854
|              97,471
|           104,781
|           112,640
|           121,088
|           130,169
|-
|
|
|
|
|
|
|
|
|
|-
|'''Operating Expenses'''
|                   (34,243)
|                   (39,373)
|            (39,368)
|           124,132
|           133,442
|           143,450
|           154,209
|           165,775
|-
|'''Research & Development'''
|                   (12,159)
|                   (14,714)
|            (14,603)
|              (9,681)
|            (10,407)
|            (11,187)
|            (12,026)
|            (12,928)
|-
|'''Selling, General &  Administrative'''
|                   (22,084)
|                   (24,659)
|            (24,765)
|              (6,058)
|              (6,512)
|              (7,001)
|              (7,526)
|              (8,090)
|-
|'''Other Operating Income  (Expenses)'''
|                         (181)
|                         (900)
|                 (783)
|            139,871
|            150,361
|            161,638
|            173,761
|            186,793
|-
|
|
|
|
|
|
|
|
|
|-
|'''Operating Income'''
|                     19,914
|                     24,547
|              24,486
|           221,603
|           238,223
|           256,090
|           275,297
|           295,944
|-
|'''Interest Income'''
|                         (111)
|                           (53)
|                 (490)
|
|
|
|
|
|-
|'''Interest expense, net of  portion capitalised'''
|                         (210)
|                         (183)
|                 (276)
|
|
|
|
|
|-
|'''Other Income/Expenses Net'''
|                     (2,899)
|                         (489)
|              (1,871)
|
|
|
|
|
|-
|'''Restructuring'''
|                         (247)
|                         (252)
|                 (321)
|
|
|
|
|
|-
|
|
|
|
|
|
|
|
|
|-
|'''Pretax Income'''
|                     16,447
|                     23,570
|              21,528
|              25,220
|              29,545
|              34,612
|              40,548
|              47,502
|-
|'''Tax Provision'''
|                     (1,783)
|                     (1,898)
|              (3,784)
|            (13,291)
|            (15,570)
|            (18,241)
|            (21,369)
|            (25,034)
|-
|'''Net Income from Continuing  Operations'''
|                     14,664
|                     21,672
|              17,744
|              11,929
|              13,975
|              16,372
|              19,179
|              22,469
|-
|
|
|
|
|
|
|
|
|
|-
|'''Gross profit margin %'''
|65.6%
|68.2%
|67.3%
|95.5%
|95.5%
|95.5%
|95.5%
|95.5%
|-
|'''Operating profit margin %'''
|24.1%
|26.2%
|25.8%
|217.1%
|217.1%
|217.1%
|217.1%
|217.1%
|-
|'''Net profit margin %'''
|17.8%
|23.1%
|18.7%
|11.7%
|12.7%
|13.9%
|15.1%
|16.5%
|-
|
|
|
|
|
|
|
|
|
|-
|'''Net  Earning per Share'''
|
|
|
|
|
|
|
|
|-
|'''Basic'''
|                         5.59
|                         7.93
|                  6.83
|                  7.79
|                  8.88
|                10.12
|                11.54
|                13.15
|-
|'''Diluted'''
|                         5.51
|                         7.81
|                  6.73
|                  7.67
|                  8.75
|                  9.97
|                11.37
|                12.96
|-
|
|
|
|
|
|
|
|
|
|-
|'''Average  Shares Outstanding'''
|
|
|
|
|
|
|
|
|-
|'''Basic'''
|                 2,632.80
|                 2,632.10
|          2,625.20
|          2,618.35
|          2,626.20
|          2,619.34
|          2,627.20
|          2,620.33
|-
|'''Diluted'''
|                 2,663.90
|                 2,674.00
|          2,670.70
|          2,663.73
|          2,656.76
|          2,649.82
|          2,642.90
|          2,635.99
|}
=== Cash Flow ===
{| class="wikitable"
|-
!'''USDm'''
!2020
!2021
!2022
!2023E
!2024E
!2025E
!2026E
!2027E
|-
|'''Assumptions'''
|
|
|
|
|
|
|
|
|-
|'''D&A as % of prior year  long term assets'''
| -
|2%
| -6%
| -1.7%
| -1.7%
| -1.7%
| -1.7%
| -1.7%
|-
|'''Stock based compensation %  growth'''
| -
|7%
|75%
|41.0%
|41.0%
|41.0%
|41.0%
|41.0%
|-
|'''Common stock repurchased %  growth'''
| -
| -7%
|28%
|10.5%
|10.5%
|10.5%
|10.5%
|10.5%
|-
|'''Dividend payout ratio'''
| -
|5%
|6%
|5.6%
|5.6%
|5.6%
|5.6%
|5.6%
|-
|
|
|
|
|
|
|
|
|
|-
|
|
|
|
|
|
|
|
|
|-
|'''Cash Flows from operating  activities'''
|
|
|
|
|
|
|
|
|-
| '''Net Income from Continuing Operations'''
|               14,714
|                20,878
|              17,941
|             11,929
|                   13,975
|                   16,372
|                   19,179
|                   22,469
|-
| '''Depreciation & Amortization'''
|                  7,231
|                  7,390
|                6,970
|              (2,298)
|                   (2,398)
|                   (2,505)
|                   (2,621)
|                   (2,746)
|-
| '''Asset write-downs'''
|                     233
|                     989
|                1,216
|                   813
|                       813
|                       958
|                       950
|                       883
|-
| '''Stock based compensation'''
|                  1,005
|                  1,135
|                1,138
|               1,605
|                     2,262
|                     3,190
|                     4,498
|                     6,342
|-
| '''Provision & Write off of Assets'''
|                       63
|                       (48)
|                     (17)
|                       -  
|                           -  
|                           -  
|                           -  
|                           -  
|-
| '''Operating Gains Losses'''
|                   (111)
|                     (617)
|                 (380)
|              (1,837)
|                     (833)
|                     (952)
|                   (1,083)
|                   (1,226)
|-
| '''Deferred Tax provision'''
|                (1,141)
|                (2,079)
|              (1,663)
|
|
|
|
|
|-
| '''Other non-cash items'''
|                (1,148)
| -
| -
|
|
|
|
|
|-
| '''Change in working capital'''
|                  2,690
|                (4,238)
|              (4,011)
|
|
|
|
|
|-
| '''Operating Cash Flow'''
|               23,536
|                23,410
|              21,194
|             10,211
|                 13,819
|                 17,062
|                 20,923
|                 25,722
|-
|
|
|
|
|
|
|
|
|
|-
| '''Cash Flows from investing activities'''
|
|
|
|
|
|
|
|
|-
| '''Investments in property, plant and  equipment'''
|                (3,347)
|                (3,652)
|              (4,009)
|                   535
|                       549
|                       564
|                       579
|                       595
|-
| '''Business Acquisitions, net'''
|                (7,323)
|                       (60)
|            (17,652)
|              (2,620)
|                           -  
|                           -  
|                           -  
|                           -  
|-
| '''Purchases of investments'''
|                (8,952)
|                (5,388)
|                9,225
|              (2,565)
|                   (2,917)
|                   (3,316)
|                   (3,771)
|                   (4,287)
|-
| '''Other investing activities'''
|                (1,203)
|                     417
|                     65
|
|
|
|
|
|-
| '''Investing Cash Flow'''
|              (20,825)
|                (8,683)
|            (12,371)
|              (4,650)
|                   (2,368)
|                   (2,752)
|                   (3,192)
|                   (3,692)
|-
| '''Other investing activities'''
|                         -  
|                       (11)
|                         1
|                       -  
|                           -  
|                           -  
|                           -  
|                           -  
|-
| '''Cash Flows from financing activities'''
|
|
|
|
|
|
|
|
|-
| '''Debt repayment (increase in debt)'''
|                  7,095
|                     (990)
|                7,452
|              (6,000)
|                   (5,307)
|                   (4,829)
|                   (4,395)
|                   (3,999)
|-
| '''Common stock issued'''
|                (3,221)
|                (3,456)
|              (6,035)
|              (8,509)
|                 (11,998)
|                 (16,917)
|                 (23,854)
|                 (33,634)
|-
| '''Common stock repurchased'''
|                  1,114
|                  1,036
|                1,329
|               1,469
|                     1,623
|                     1,793
|                     1,981
|                     2,189
|-
| '''Dividends paid'''
|              (10,481)
|              (11,032)
|            (11,682)
|                 (667)
|                     (782)
|                     (916)
|                   (1,073)
|                   (1,257)
|-
| '''Other financing activities'''
|                   (627)
|                     395
|                     65
|                       -  
|                           -  
|                           -  
|                           -  
|                           -  
|-
| '''Financing Cash Flow'''
|                (6,120)
|              (14,047)
|              (8,871)
|           (13,708)
|                 (16,464)
|                 (20,870)
|                 (27,340)
|                 (36,701)
|-
|
|
|
|
|
|
|
|
|
|-
| '''Cash'''
|
|
|
|
|
|
|
|
|-
| '''Net change in cash'''
|               17,238
|                  9,304
|                7,329
|           (12,798)
|                   (7,381)
|                   (9,313)
|                 (12,800)
|                 (18,363)
|-
| '''Cash at beginning of period'''
| -
|                17,238
|              26,542
|             33,871
|                   21,073
|                   13,692
|                     4,380
|                   (8,420)
|-
| '''Cash at end of period'''
|               17,238
|                26,542
|              33,871
|             21,073
|                   13,692
|                     4,380
|                   (8,420)
|                 (26,783)
|}
=== Balance Sheet ===
{| class="wikitable"
|-
!'''USDm'''
!2020
!2021
!2022
!2023E
!2024E
!2025E
!2026E
!2027E
|-
|'''Cash and Short Term  Investments'''
| -0.5%
|25.0%
| -26%
| -0.3%
|
|
|
|
|-
|'''Accounts Receivable % Revenues'''
| -
|13%
|26%
|19.3%
|19.3%
|19.3%
|19.3%
|19.3%
|-
|'''Inventory % Revenue'''
| -
|11%
|20%
|15.6%
|15.6%
|15.6%
|15.6%
|15.6%
|-
|'''Other Current Assets'''
| -
|18.0%
| -
|18.0%
|18.0%
|18.0%
|18.0%
|18.0%
|-
|'''Net Property, Plant &  Equipment (PPE)'''
| -
|1%
|4%
|2.7%
|2.7%
|2.7%
|2.7%
|2.7%
|-
|'''Other Non-Current Assets'''
| -
|35%
| -8%
|13.7%
|13.7%
|13.7%
|13.7%
|13.7%
|-
|'''Goodwill'''
| -
| -9%
|15%
|2.8%
|2.8%
|2.8%
|2.8%
|2.8%
|-
|'''Accounts Payable % COGS'''
| -
|4%
|5%
|4.4%
|4.4%
|4.4%
|4.4%
|4.4%
|-
|'''Other Current Liabilities'''
| -
|3%
| -7%
| -2.1%
| -2.1%
| -2.1%
| -2.1%
| -2.1%
|-
|'''Short term debt % LT debt'''
| -
|43%
|239%
|141.0%
|141.0%
|141.0%
|141.0%
|141.0%
|-
|'''Long Term Debt'''
| -
| -8%
| -10%
| -9.0%
| -9.0%
| -9.0%
| -9.0%
| -9.0%
|-
|'''Other Non-Current Liabilities'''
| -
| -10%
| -15%
| -12.5%
| -12.5%
| -12.5%
| -12.5%
| -12.5%
|-
|
|
|
|
|
|
|
|
|
|-
|'''Cash and Short Term  Investments'''
|                     25,186
|               31,608
|                   23,519
|                   23,401
|             23,284
|             23,168
|             23,052
|             22,937
|-
|'''Accounts Receivable'''
|                     13,576
|               15,283
|                   19,292
|                   19,647
|             21,121
|             22,705
|             24,408
|             26,238
|-
|'''Inventory'''
|                       9,344
|               10,387
|                   12,483
|                   15,871
|             17,061
|             18,341
|             19,716
|             21,195
|-
|'''Other Current Assets'''
|                       3,132
|                 3,701
| -
|                           -  
|                       -  
|                       -  
|                       -  
|                       -  
|-
|'''Total Current Assets'''
|                     51,238
|              60,979
|                 55,294
|                 58,920
|             61,466
|             64,214
|             67,176
|             70,370
|-
|'''Net Property, Plant &  Equipment (PPE)'''
|                     18,766
|               18,962
|                   19,803
|                   20,338
|             20,887
|             21,451
|             22,030
|             22,625
|-
|'''Other Non-Current Assets'''
|                     15,097
|               20,439
|                   18,725
|                   21,290
|             24,207
|             27,523
|             31,294
|             35,581
|-
|'''Goodwill'''
|                     89,795
|               81,638
|                   93,556
|                   96,176
|             98,868
|           101,637
|           104,483
|           107,408
|-
|'''Total Non-Current Assets'''
|                   123,658
|            121,039
|               132,084
|               137,804
|           143,962
|           150,611
|           157,807
|           165,614
|-
|'''Total Assets'''
|                   174,896
|            182,018
|               187,378
|               196,723
|           205,429
|           214,825
|           224,983
|           235,985
|-
|
|
|
|
|
|
|
|
|
|-
|'''Accounts Payable'''
|                     36,378
|               37,874
|                   39,703
|                   41,609
|             43,440
|             45,351
|             47,346
|             49,430
|-
|'''Other Current Liabilities'''
|                       3,484
|                 3,586
|                     3,328
|                     3,260
|               3,193
|               3,127
|               3,063
|               3,001
|-
|'''Short term debt'''
|                       2,631
|                 3,766
|                   12,771
|                   34,500
|             31,395
|             28,569
|             25,998
|             23,658
|-
|'''Total Current Liabilities'''
|                     42,493
|              45,226
|                 55,802
|                 79,369
|             78,027
|             77,048
|             76,408
|             76,088
|-
|'''Long Term Debt'''
|                     32,635
|               29,985
|                   26,888
|                   24,468
|             22,266
|             20,262
|             18,438
|             16,779
|-
|'''Other Non-Current Liabilities'''
|                     36,488
|               32,784
|                   27,884
|                   24,399
|             21,349
|             18,680
|             16,345
|             14,302
|-
|'''Total Non-Current Liabilities'''
|                     69,123
|              62,769
|                 54,772
|                 48,867
|             43,615
|             38,942
|             34,784
|             31,081
|-
|'''Total Liabilities'''
|                   111,616
|            107,995
|               110,574
|               128,235
|           121,642
|           115,990
|           111,191
|           107,169
|-
|
|
|
|
|
|
|
|
|
|-
|'''Common Stock Equity'''
|                     63,278
|              74,023
|                 76,804
|                 68,488
|             83,787
|             98,835
|           113,792
|           128,815
|-
|'''Noncontrolling interests in  subsidiaries'''
|                               -  
|                       -  
|                           -  
|
|
|
|
|
|-
|'''Equity + Liabilities'''
|                   174,896
|            182,018
|               187,378
|               196,723
|           205,429
|           214,825
|           224,983
|           235,985
|}
== Valuation ==
== Valuation ==


Line 1,552: Line 307:


==== What's the expected return of an investment in the company? ====
==== What's the expected return of an investment in the company? ====
The Stockhub users estimate that the expected return of an investment in the company over the next five years is negative 22.83%, which equates to an annual return of negative 4.96%. In other words, an £1,000 investment in the company is expected to return £774 in five years time. The assumptions used to estimate the return figure can be found in the table below.
The Stockhub users estimate that the expected return of an investment in the company over the next five years is ccc%, which equates to an annual return of ccc%. In other words, an £1,000 investment in the company is expected to return £ccc in five years time. The assumptions used to estimate the return figure can be found in the table below.


Assuming that a suitable return level over five years is negative 4.96% per year or less, and Johnson & Johnson achieves its expected return level (of negative 4.96%), then an investment in the company is considered to be an 'suitable' one.
Assuming that a suitable return level over five years is ccc% per year or less, and Pantheon Resources achieves its expected return level (of ccc%), then an investment in the company is considered to be an 'suitable' one.


==== What are the assumptions used to estimate the return? ====
==== What are the assumptions used to estimate the return? ====
Line 1,569: Line 324:
|Which type of discounted cash flow model do you want to use?
|Which type of discounted cash flow model do you want to use?
|Dividend discount model
|Dividend discount model
|
|The policy of Alpha FMC is to pay out approximately half of adjusted profit after tax. Accordingly, we suggest using the dividend discount model (DDM), which is one of the most common discounted cash flow models.
|-
|-
|How many distinct stage of growth do you want to use?
|How many distinct stage of growth do you want to use?
Line 1,615: Line 370:
The main inputs that result in the greatest change in the expected return of the Johnson & Johnson investment are, in order of importance (from highest to lowest):
The main inputs that result in the greatest change in the expected return of the Johnson & Johnson investment are, in order of importance (from highest to lowest):


# The discount rate (the default rate is 9.98%).
# The size of the total addressable market (the default size is $ccc);
# The initial growth rate (the default rate is 5.93%);
# Johnson & Johnson peak market share (the default share is ccc%); and
# The half life of the initial dividend growth rate (10 years); and
# The discount rate (the default time-weighted average rate is ccc%).
# The terminal growth rate (the default rate is 3%).


The impact of a 10% change in those main inputs to the expected return of the Johnson & Johnson investment is shown in the table below.
The impact of a 50% change in those main inputs to the expected return of the Johnson & Johnson investment is shown in the table below.
{| class="wikitable sortable"
{| class="wikitable sortable"
|+Johnson & Johnson investment expected return sensitivity analysis
|+Johnson & Johnson investment expected return sensitivity analysis
!Main input
!Main input
!10% worse
!50% worse
!Unchanged
!Unchanged
!10% better
!50% better
|-
|-
|The default rate
|The discount rate
|(32.48)%
|ccc%
|(22.83)%
|ccc%
|(9.95)%
|ccc%
|-
|-
|The initial growth rate
|The size of the total addressable market
|(28.73)%
|ccc%
|(22.83)%
|ccc%
|(16.62)%
|ccc%
|-
|-
|The half life of the initial dividend growth rate
|Johnson & Johnson peak market share
|(24.54)%
|ccc%
|(22.83)%
|ccc%
|(21.12)%
|ccc%
|-
|The terminal growth rate
|(24.50)%
|(22.83)%
|(21.01)%
|}
|}


== Appendix ==
 


{| class="wikitable"
{| class="wikitable"
Line 1,673: Line 422:
|Cost of equity = Risk-free rate + Beta x Equity risk premium.
|Cost of equity = Risk-free rate + Beta x Equity risk premium.
|}
|}
== Appendix ==


=== Johnson & Johnson dividends ===
=== Johnson & Johnson dividends ===
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