Financial Modeling and Analysis of Johnson & Johnson Company

This report provides a comprehensive financial analysis of Johnson & Johnson, evaluating its macroeconomic environment, industry position, and company valuation. It examines the current economic conditions in the United States, focusing on the pharmaceutical industry's life cycle and growth. Porter’s Five Forces model is applied to assess the competitive landscape, bargaining power of buyers and suppliers, threat of substitution, and threat of new entrants. The report includes a ratio analysis of Johnson & Johnson's financial performance over the past five years, evaluating profitability, liquidity, leverage, and efficiency compared to competitors like Merck and Pfizer. The DuPont analysis highlights improvements in return on equity. Ultimately, the report recommends that investors purchase Johnson & Johnson stock, as it is currently undervalued and poised for future returns.

Running Head: Financial Modelling 1

Financial Modelling 2
Contents
Introduction:.....................................................................................................................3
Part A: Macro economical and industry analysis:............................................................3
Current economic condition:............................................................................................3
Industry life cycle and industry growth:...........................................................................4
Porter’s five forces model:................................................................................................4
Ratio analysis:...................................................................................................................6
Recommendation:.............................................................................................................7
References.........................................................................................................................8

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Introduction:
This report emphasize upon the various factors of an organization and its external market. In
the report, the industry, economical and company valuation of Johnson & Johnson has been
evaluated to measure the investment position of the company. the financial performance of last 5
years of the company has also been evaluated to measure the overall performance of the company.
Part A: Macro economical and industry analysis:
For evaluating the external factors of the company, industry evaluation and the macro
economical position of the company has been evaluated which are as follows:
Current economic condition:
The economy of United States has been evaluated and it has been measured that the economy
is among the largest developed mixed economy at worldwide. The purchasing power parity (PPE) of
the company is second largest industry and it is highly developed mixed economy at international
level. The rapid changes have taken place in the economy performance. The US pharmaceuticals
company are among the most crucial national markets.
The pharmaceutical industry evaluation explains that the United states holds around 45% of the
total international pharma market at international level. The US economy along with the Mexico and
Canada explains about the highest continental pharma market at international market. The US
economy report explains that the pharmaceuticals industry is not the innovative one still it is the
largest one. The Statista (2018) explains that the US pharmaceuticals industry has generated around $
5 trillion in past year which contributes around 2% in the total economy of the company.

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Figure 1: Pharmaceuticals industry
(Economy Watch, 2018)
Industry life cycle and industry growth:
The pharmaceuticals industry of US has been evaluated and the reports about the
pharmaceuticals industry explains that the currently industry is on maturity stage but the firms and
the industry are making huge efforts to manage the growth stage of the company and for that various
innovations have been done in the pharmaceuticals industry. These innovative changes would impact
on the company’s performance positively. It explains that the performance of the pharmaceuticals
industry would be improved more. The overall contribution of the industry in US market is around $
5 trillion.
Porter’s five forces model:
Porter’s 5 forces study has been conducted on the US pharmaceuticals industry to measure the
external performance of the industry and its impact on Johnson & Johnson. The porter’s 5 forces
model is as follows:
Porter’s five forces model:

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Competitive
Rivalry
The competitive rivalry is quite higher in the pharmaceuticals industry. The
main factors behind higher competition rivalry is:
 Large number of companies in the retail industry
 High variety of medicines and the firms
 Great aggressiveness in pharma companies (Pharma, 2018)
Johnson & Johnson has faced the great competition in the market.
However, the current performance of the company is quite better.
Bargaining
power of
buyers
The bargaining power of buyers is quite lower in the pharmaceuticals
industry. Due to the nature of the product and:
 Less diversity in buyers
 Small size of purchase
Johnson & Johnson has faced the great impact due to lower bargaining
power of buyers in the market. The current performance of the company is
quite better.
Bargaining
power of
suppliers
The bargaining power of suppliers is quite higher in the retail industry. Due
to the great number of firms, they can manipulate the raw material prices.
Some of the threats of the company are as follows:
 Few number of suppliers
 Huge competition among the firms
 Less availability of supply (Statista, 2018)
Johnson & Johnson has faced the great impact due to bargaining power of

Financial Modelling 6
suppliers in the market.
Threat of
substitution
The threat from substitution is quite lower due to the:
 Less availability of substitute ‘
 Allergic issues
Johnson & Johnson has not affected much due to substitute products.
Threat of
new
entrants
The threat from new entrant is lower in the pharmaceuticals industry. Due
to the:
 Higher cost of doing the business
 Huge capital cost of the business
Johnson & Johnson has faced lower threat from the new entrants as it
already leader in the market.
Ratio analysis:
The ratio analysis study has been conducted on the Johnson & Johnson to measure the
performance of the company. On the basis of the ratio analysis on Johnson & Johnson, the
profitability position, liquidity level, leverage and efficiency position of the company has been
evaluated on the basis of the competitors of the company. On the basis of the study, it has been found
that the profitability position of the company has been reduced from last 5 years. However, the
profitability level of the company is higher than the competitor Merck and Pfizer (Morningstar,
2018).

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In addition, the asset efficiency ratios of the company have been changed a lot from last 5 years
and explain about better working capital management of the company. However, the efficiency level
of the company is still required to be enhanced than the competitor Merck and Pfizer (Morningstar,
2018).
Lastly, the liquidity and leverage ratio of the company has been measured to identify the
overall performance of the company and it has been measured that the few changes have been done
by the company in overall financial performance of the company and the performance of the
company is quite better in the industry.
The DuPont evaluation on the company explains that the return on equity position of the
company has improved the overall performance and the position of the company. The leverage
position is the main reason behind the changes into the DuPont position.
Recommendation:
On the basis of the above evaluation and study, it has been recognized that the stock must be
purchased by the investors of the company of Johnson & Johnson. The stock of the company is
undervalued now. If the investors would buy it now than huge return would be got by the company.

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References:
Economy Watch. “US pharmaceuticals industry”. (Online). Accessed on 3rd June 2018. 2018.
<http://www.economywatch.com/world-industries/pharmaceutical/us.html>
Morningstar. “Merck & Co Inc”. (Online). Accessed on 3rd June 2018. 2018. <
http://financials.morningstar.com/ratios/r.html?t=MRK>
Morningstar. “Pfizer Limited”. (Online). Accessed on 3rd June 2018. 2018. <
http://morningstar.in/equities/stockreport_keyratios.aspx?id=0p0000aq0b&stockname=bse-pfizer-
ltd>
Pharma. “overall economic contribution”. (Online). Accessed on 3rd June 2018. 2018.
<https://www.phrma.org/media/industry-economic-impact>
Statista. “US pharmaceuticals industry”. (Online). Accessed on 3rd June 2018. 2018.
<https://www.statista.com/topics/1719/pharmaceutical-industry/>