Fi306 Equity Valuation Project Answers Assessment Answers
A.Macroeconomic and industry analysis:
1) What are the implications of the current economic conditions on the industry that your firm operates in? Discuss the sensitivity of the firm’s industry to the business cycle.
2) Provide an evaluation of the industry life cycle and prospects for industry growth.
3) Provide a concise Porter’s five forces analysis on the industry. What is the overall attractiveness of the industry (summary of the Porter’s Five Forces analysis)? What seems to be the most intense competitive force? Who are the key competitors?
4) Perform ratio analysis and compare the firm’s key financial ratios. You need to look at profitability, efficiency, liquidity, and leverage ratios. Use the ratios you think are the most meaningful for your company. FactSet is a good resource for this. Remember that ratio analysis include looking at the company history (5 year average) and its industry. You could use FactSet Comparative Analysis to calculate peer group averages yourself if you do not like FactSet industry analysis. Examine the ROE using Dupont decomposition, and explain what is driving the ROE. Does the firm have higher (lower) ROE than competitors because of higher (lower) margin, higher (lower) efficiency, or higher (lower) leverage? Where does the firm stand out from the competitors? The ratio should be presented in a table format and the conclusion of the ratio analysis should not repeat what is available in the table.
Answer:
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.
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:
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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. |
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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. |
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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 suppliers in the market. |
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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. |
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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).
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.
References:
Economy Watch. “US pharmaceuticals industry”. (Online). Accessed on 3rd June 2018. 2018. <https://www.economywatch.com/world-industries/pharmaceutical/us.html>
Morningstar. “Merck & Co Inc”. (Online). Accessed on 3rd June 2018. 2018. < https://financials.morningstar.com/ratios/r.html?t=MRK>
Morningstar. “Pfizer Limited”. (Online). Accessed on 3rd June 2018. 2018. < https://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/>
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