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Animal Health International Inc Stock Analysis

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Animal Health International  Inc Stock Analysis Powered By Docstoc
					Financial Analysis
     Fiscal Year 2005
  and up to November 27, 2006


ECP 5705: Managerial Economics
        Dr. Dinopoulos
                         Introduction

1   Corporate Overview

2   Market Analysis


3   Corporate Strategy


4   Financial Overview
    Conclusion

5   Stock Performance
                     Corporate Overview
                            Medical Equipment      Consumer Products
                              34.70%                       18.10%
Johnson & Johnson
    115,700 employees
    230 companies
    57 countries.
    Annual sales of over                             47.30%
     $50 billion dollars                        Pharmaceuticals

    A leading
     Multinational
     Enterprise (MNE)
                        Corporate Mission


Johnson & Johnson’s credo:
     Unifies their employees, focuses their broad
      corporate vision, and defines their responsibilities to:
        Customers
        Employees
        Communities
        Stockholders
              Corporate Positioning

The Consumer Segment
     Baby and child care, skin care, oral care, wound care,
      women's health, supplements, non-prescription drugs
The Pharmaceutical Segment
     Anti-fungal, anti-infective, cardiovascular, contraceptive,
      dermatology, gastrointestinal, hematology, immunology,
      neurology, oncology, pain management, psychotropic,
      urology
The Medical Devices and Diagnostics
     Wholesalers, hospitals, retailers, physicians, nurses,
      therapists, hospitals, diagnostic laboratories, clinics
                   Corporate Exposure
                                           Advertising

Advertising Campaigns
     #9 advertiser in the world at $1.9B in 2004
     Johnson & Johnson’s Media Futures Group, Universal
      McCann, and ABC’s Enhanced TV Group launched an
      interactive advertising campaign
         PC, Set-top box (STB), and short message service
          (SMS) for 15 brands during The View: His/Her Body
          Test®
     America's Nurses: They Dare to Care
     Having a Baby Changes Everything
     The Johnson & Johnson Spotlight Presentation SM series
                      Corporate Exposure
                                                       Publicity

Working Mothers Magazines
    top 100 best place for mothers to work
IndustryWeek Magazine
    Jaurez, Mexico plant named top 10 Best Plants in North America
Barron’s 2006 survey
  “Most Respected Company” in, #2 in 2005
  Sixth most admired company in America
  First in Pharmaceuticals category, five consecutive years
The Human Rights Campaign Foundation
    Best Places for workplace equality
The Ron Brown Award for Corporate Leadership
    The only U.S. presidential award for companies with exemplary
     relationships with employees and communities
                          Market Analysis
         Porters Five-Forces of Competition

                      Substitute
                       Products
                      House Brand
                      Private Label
                         Generic



  Supplier             Internal           Buyer
 Bargaining             Rivalry         Bargaining
   Power                Pfizer, Inc       Power
 Good Worldwide      GlaxoSmithKline    Managed Care
     Supplies               plc         Organizations
Limited Bargaining   Roche Holdings      Government
      Power                 Ltd        Health Programs
                       Novartis AG


                       Potential
                     New Entrants
                      New Generic
                      Manufacturers
                       New Global
                       Competition
                                   Porter Analysis
                                           Internal Rivalry

The major drug industry
      Intensely competitive in 2006
      Highly regulated
      Increase in generic drugs
Competitors Differentiation by:
      Safety, cost, efficacy, and ease of use
      Value perception primary driver
R&D Budgets
      Large budgets (13.3 %), J&J (12.5%)
Operational Effectiveness
Direct-to-Consumer
      Increased from 2000 to 2006
Medical Research Grants
      Increased from 2000 to 2006
                              Porter Analysis
                                         New Entrants

Drug Industry
      Global expansion and global competitors on the rise
New Generic Drug Manufacturers
Major drug makers tried to counter:
    Minor alterations to old formulas
    Similar products with new patents

Animal Health Segment
                          Porter Analysis
                   Substitutes and Compliments


Generic Medicines
     The largest segment of substitutes
Major Retailers
     “Private label” or “house brand” non-
      prescription products
Homeopathic Alternatives
     Aging baby-boomers
                        Porter Analysis
                               Supply Power

Raw Materials
   Many global sources in 2006
   Abundant supply in 2006
   No anticipation of scarcity
   The industry enjoyed limited supplier power
                                  Porter Analysis
                                            Buying Power

Managed Care Organizations (MCO) Consolidation
      Pooling of the patient population
      Medical insurance companies, health maintenance organizations
       (HMO), medical administrators, hospital alliances, and physicians’
       organizations
J&J and Network Effect
      Cost pressures, managed care continued to push generic
       medicines and alternate therapies
      Control of government medication programs
J&J’s Aggressive Price Policy
      Competing for Government and Managed Care Programs
                          SWOT Analysis
                                        Strengths

Prudential Equity
     Analysts upgraded J&J in 2006 to a “buy” due
      to improved diversification strategies across
      its business units
The Pharmaceuticals
     Improved earnings forecast 3rd quarter
Pfizer Consumer Division Acquisition
     Strong shift into the consumer segment for
      J&J
                         SWOT Analysis
                                   Weaknesses

Product Innovation
   J&J suffers from lackluster innovation
   Current product lines are stagnate

Competitors
   Abbott/Guidant and Conor Medsystems
    penetration of Japan, Europe, and the United
    States
   J&J could see declines as high as 73 percent,
    21.5 percent, and 21.9 percent respectively in
    these markets
                        SWOT Analysis
                                      Opportunities


The Center for Disease Control (CDC)
   The CDC estimate that a third of HIV patients
    in 2006 do not receive treatment
   New guidelines for HIV diagnostics

New Product Launch
   Prezista, an HIV protease in fall of 2006
   Credit Suisse analysts project a five percent
    growth rate compounded annually from 2005
    to 2010
                         SWOT Analysis
                                             Threats

Patent Expirations
   Losing Risperdal in 2008, a leading
    schizophrenia medication
   Credit Suisse analysts remain optimistic that
    J&J can protect its category lead
Drug-eluting Stents
   Stent industry under litigation attack
   Prudential Equity analysts say J&J in

      November, 2006 already reflect a risk discount
          Competitive Positioning
              High Revenue
                                                         Procter &
                                                         Gamble Co
                                                   JNJ
                                                    Pfizer Inc

                              Glaxosmithkline PLC
              3M Company             Unilever
Low CAP                                           High CAP
                    Bayer AG
                           Colgate-Palmolive Company

                        Boston Scientific Corp.

                Alcon

               Low Revenue
                       Corporate Strategy

•At the core of their successful strategy is
        their four guiding principals
                                                              Sales (in Billions)

                                                       Consumer   Pharmaceutical    Medical
   Live by the Credo
                                                                                      9.72




   Broad base in human health care             20.29




   Decentralized Management

                                                                                       23.24


   Long Term Business Management
   Conclusion
                        Decentralized
                         Management
  Group
Operating
Committee

             Global
            Franchise
            Committee
                        38 Major
                        Industry
                          Units        230
                                   Autonomous
                                    Companies
                   Offense and Defense

Capture market share across a broad selection of human
  health care products

Defensively, they market heavily on brand recognition

Established deep relationships with core customers and
  continue to extend popular brand segments

According to Reuters’ Financial, Johnson & Johnson is in
  the top three:
          consumer health
          personal care
          medical devices
          pharmaceuticals industries.
                       Firm Analysis




Competition   Growth          Value
                                                                                                          Historical Growth
       80

       70

       60

       50

       40

       30

       20

       10                                                           JNJ 10 yr Snapshot
        0
            11/29/1996
                         5/29/1997
                                     11/29/1997
                                                  5/29/1998
                                                              11/29/1998
                                                                           5/29/1999
                                                                                       11/29/1999
                                                                                                    5/29/2000
                                                                                                                11/29/2000
                                                                                                                             5/29/2001
                                                                                                                                         11/29/2001
                                                                                                                                                      5/29/2002
                                                                                                                                                                  11/29/2002
                                                                                                                                                                               5/29/2003
                                                                                                                                                                                           11/29/2003
                                                                                                                                                                                                        5/29/2004
                                                                                                                                                                                                                    11/29/2004
                                                                                                                                                                                                                                 5/29/2005
                                                                                                                                                                                                                                             11/29/2005
                                                                                                                                                                                                                                                          5/29/2006
J&J has 21 straight years of double digit sales
Total return to shareholders, including
  dividends, has grown at a compounded rate
  of more than 18% per year since their stock
  was first traded publicly in 1944
                      Growth & Innovation

J&J has a structure 3 step formula for the future :
      Aggressive investment in research and development
         R&D spending in 2005 rose 21% to $6.3B. Roughly, 13% of
          sales are funneled to R & D
      Extensive collaboration and strategic alliances
         Breakthroughs and successful management strategies are
          passed on to sister segments. Strategic alliances and
          outsourcing technologies or operations to external partners
      Selective licensing and acquisition
         J&J searches for innovations from outside its organizations.
          They regularly seek companies or ideas that can add value
          to any one of its segments
                           Developing Markets
                                   International sales: currently
             United States         44%
             Europe
             Asia/Africa            In 2006, international growth is
$30,000      Americas (Not U.S.)   outpacing domestic growth
                                   18.5% to 6.3%:
$25,000                                  Growth from
$20,000                                     product marketing,
                                            innovative manufacturing
$15,000                                     product development

$10,000                                     leadership development
                                         Long term growth:
 $5,000                                     developing underserved

    $0                                       international markets
          2005 2004 2003
                         Financial Overview
                                                            Profitability

J&J’s profit foundation:
  stability, broad base and                                Operating Profit

  cash management. They        16,000.00
  should surpass $15B in
  profits by the end of 2006   14,000.00

                               12,000.00

                               10,000.00                                           Consumer
Cash: $12B in cash              8,000.00
                                                                                   Pharmaceutical
  reserves coupled with                                                            Medical
                                6,000.00
  minimal debt of $2.2B                                                            Total

  (5.3%) debt translate into    4,000.00

  brute financial strength      2,000.00

                                    0.00
                                           2002   2003   2004   2005 2006E 2007E
Broad base: No single
  company accounts for
  even 10% of J&J’s sales
                           Financial Overview
                                                           Ratios
J&J’s has stable returns, intrinsic profitability
Inventory turnover is consistent with the other competing segments
Outstanding capital investment returns to compliment modest sales
   returns
J&J is on track to average a 20% return while the Industry Peer average
   is -7.4%
                            Re turn on Capital

 25.0%

 20.0%

  15.0%

  10.0%                                                      COC
                                                             ROC(J&J)
  5.0%                                                       ROC(PEERS)

  0.0%
          2002      2003       2004          2005   2006
  -5.0%

 -10.0%
                                                           Financial Overview
                                                                                 J&J vs. Industry
                                                                           30


                                                                           25


Growth Rates(%)                                  J&J       Industry        20
                                                                                                                              J&J
                                                                           15

Sales vs Qtr. 1 Yr. Ago                           7.94        4.55         10                                                 Industry
Sales vs TTM 1 Yr. Ago                           3.15         1.32          5



Sales - 5YR GR                                   11.61        7.72          0


                                                                                 Return On    Return On      Return On
EPS vs Qtr. 1 Yr. Ago                            10.89      -12.48
                                                                                  Assets     Assets - 5YR   Investment
EPS vs TTM 1 Yr. Ago                              22         34.58                              AVG
EPS - 5YR GR                                     16.49        6.53
Capital Spending - 5YR GR                        9.28         2.86

                                                                                Management
                                                                                                            J&J          Industry
                                                                                Effectiveness
                                    Beta
                                                                                Return On Assets -          18.22         13.02
      B eta                                                                     5YR AVG                     16.93         12.93
                                                                                Return On Investment        27.77         17.16
              0   0.1   0.2   0.3          0.4       0.5    0.6      0.7
                                                                                ROI - 5YR AVG               22.58         18.39
                               J&J     Industry
                                                                                Return On Equity -           28.8          24.8
                                                                                5YR AVG                     28.48         28.65
                   Financial Overview
                      Total Debt to Equity                Debt
                   Medical
                   Mean         JnJ
                                             Pharm Mean




                    Consum er
                      Mean




J&J is one of only six AAA credit-rated companies in
   America
Long Term Debt to Equity Ratio about 5.3%,
   significantly lower than the other segment averages
   (less volatile)
It can also means that J&J has underleveraged
   available assets
                           FCF Valuation
      Discount
        Rate




10 year
                                    JnJ’s
Forecast
                               Intrinsic Value
                 Today’s
                   PV
                                    Discount Rate
Calculating Discount Rate:
Risk-free rate (Current Treasury rate-10yr)        4.88%
Market Risk premium                                7.15%
Beta                                                 0.31
Cost of Equity calculated using CAPM               7.09%
After-tax cost of Debt                             4.55%
Book Value of Debt+Long Term Debt               3,109.00
Stock Price                                        65.09
Number of Shares                                2,925.00
Market Value of Equity                        190,388.25
Debt Ratio                                         5.09%
Equity Ratio                                     94.91%
Discount Rate (WACC)                            6.96%
                                                                                10 yr Forecast
                                                        January     January   January   January   January   January   January   January   January   January   January
                                                         2006        2007E     2008E     2009E     2010E     2011E     2012E     2013E     2014E     2015E     2016E
Time                                                       0           1         2         3         4         5         6         7         8         9        10

NON-CONSTANT GROWTH PERIOD
Forecasted Revenue                                      50514.00 54555.12 58919.53 63633.09 68087.41 72853.53 77953.27 82630.47 87588.30 91967.71 96566.10
Estimated Growth Rate                                                 0.08     0.08     0.08     0.07     0.07     0.07     0.06     0.06     0.05     0.05
Operating Margin                                                      0.26     0.24     0.24     0.24     0.24     0.24     0.24     0.24     0.24     0.24
EBIT                                                                13710.00 14140.69 15271.94 16340.98 17484.85 18708.79 19831.31 21021.19 22072.25 23175.86
Tax Rate                                                              0.35     0.35     0.35     0.35     0.35     0.35     0.35     0.35     0.35     0.35
NOPAT or NOPLAT                                                      8911.50 9191.45 9926.76 10621.64 11365.15 12160.71 12890.35 13663.77 14346.96 15064.31


Net PP&E                                                10830.00 11696.40 12632.11 13642.68 14734.10 15912.82 17185.85 18217.00 19310.02 20275.52 21289.30
Estimated Capital Growth Rate                                      0.08     0.08     0.08     0.08     0.08     0.08      0.06    0.06      0.05    0.05
Depreciation (10% of PPE each year)                     1083.00 1169.64 1263.21 1364.27 1473.41 1591.28 1718.58 1821.70 1931.00 2027.55 2128.93
Required Capital Expenditures                                     2036.04 2198.92 2374.84 2564.82 2770.01 2991.61 2852.85 3024.02 2993.05 3142.71
PPE/Sales                                                 0.21     0.21     0.21     0.21     0.22     0.22     0.22      0.22    0.22      0.22    0.22
Growth in CAPEX                                                             0.08     0.08     0.08     0.08     0.08     -0.05    0.06     -0.01    0.05


Net Operating Working Capital                           37871.00 40900.68 44172.73 47706.55 51523.08 55644.92 60096.52 63702.31 67524.45 70900.67 74445.70
Estimated Growth Rate in Working Capital                           0.08     0.08     0.08     0.08     0.08     0.08      0.06    0.06      0.05    0.05
NOWC/Sales                                                0.75    0.7497 0.7497 0.7497 0.7567 0.7638 0.7709 0.7709 0.7709 0.7709 0.7709
Change in Net Operating Working Capital                           3029.68 3272.05 3533.82 3816.52 4121.85 4451.59 3605.79 3822.14 3376.22 3545.03
Growth in Change in Net Operating Working Capital                           0.08     0.08     0.08     0.08     0.08     -0.19    0.06     -0.12    0.05


Free Cash Flow (FCF)                                                5015.42 4983.68 5382.37 5713.70 6064.58 6436.09 8253.41 8748.62 10005.24 10505.50
Growth in Free Cash Flow                                                     -0.01   0.08    0.06    0.06    0.06    0.28    0.06     0.14     0.05
Present Value of Free Cash Flow                                     4674.13 4328.51 4356.68 4310.16 4263.54 4216.83 5039.54 4978.41 5306.07 5192.26
Present Value of Free Cash Flows(non-constant period)   46,666.12
                                   Intrinsic Value
Forecasted Free Cash Flow - Terminal Date                   11,837.48
Long-run Constant Growth Rate                                   4.00%
Discount Rate                                                   7.30%
Present Value of Free Cash Flow at Terminal Date           358,541.07
Present Value of Free Cash Flows(constant growth period)   177,205.89
Mid-year Adjustment Factor                                     1.0359
Estimated Value of Firm                                    231,901.11
Value of Debt (Assume BV = MV)                               3,109.00
Estimated Value of Equity                                  228,792.11
Number of Shares                                                 2925
Intrinsic Value                                              $78.22
                             FCF Valuation


                Predicted       Buy
                                       Undervalued
               Value/Share     Value

    K 2J        $78.22                  $13.22

S&P Analysis   $75 - $77      $65.00   $10-$12
 Rochdale
 Analysis
                  $77                     $12
                 Key Investment Factors

Third Quarter Earnings up $0.95 vs. $0.85 expected
Third Quarter Sales Revenue up 7.9% vs. 6.7 expected
EPS up 10% and expected to continue through 2007
J&J $16B deal to buy Pfizer Inc.'s consumer unit. Expect 7.5%
   increase in pharmaceutical sales annually
J&J agreed to acquire cardiac-device maker Conor Med
   Systems Inc. for about $1.4 billion. Expected return,
   $700M/year
FDA supports J&J’s injunction to block a generic version of
   Risperdal and Topamax ($1.7 billion annual sales) until late
   2007
J&J’s Beta is .31 which shows increased stability and
   decreased price volatility
                                       Stock Analysis
                           %Gain JNJ vs NASDAQ

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                       Stock Performance

Our buy order for J&J executed on October 2, 2006 at 9:00am
  at $65.00; NASDAQ opened at $2,237.60
Our sell order was fill on November 27, 2006 at 4:15pm at
  $65.65; NASDAQ closed at $2405.92.
Gain through stock divdend was $0.38 per share for a total
  dividend payment of $585.20
J&J adjusted gain: 1.5%; NASDAQ net gain: 7.5%
The firm has low debt, a strong asset base, and healthy cash
  flows. In light of these positive factors, the firm is currently
  undervalued with an estimated intrinsic value around
  $78.22. Furthermore, with an 55-day yield of 1.6852%
  would provide a 11.1% yield annually. Therefore, Johnson
  & Johnson is currently a good value buy for the long term
Questions?

				
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