After selling some of its stake last year, Berkshire Hathaway
It's pretty clear what the Oracle of Omaha sees in Johnson & Johnson: the diversified health-care giant is as cheap as it's ever been. Pick your favorite valuation metric:
Metric |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
Current |
---|---|---|---|---|---|---|---|
Enterprise Value/Revenue |
3.65 |
3.74 |
3.36 |
3.30 |
2.92 |
2.56 |
2.50 |
Price/Book Value |
5.80 |
7.71 |
4.64 |
4.46 |
4.06 |
3.51 |
3.09 |
Price/EPS |
20.71 |
21.62 |
17.21 |
17.73 |
16.27 |
12.68 |
12.26 |
Source: Capital IQ, a division of Standard & Poor's. Average valuation for years indicated.
So should you follow Buffett's lead? Only if you have the same time horizon -- how's forever sound to you? -- and I'm not sure you need to buy as quickly as Buffett did. Keeping in mind, we don't know if he's done yet.
Like its pharma compatriots -- Pfizer
I think there's an excellent chance that Johnson & Johnson turns things around. You don't get too many chances to buy excellent companies at beaten down prices, but I'm not convinced it's going to be a quick turnaround either.
The loss of revenue from its recall-related plant closure isn't the major problem -- that only amounts to about 1% -- but the quality control issues are going to take a lot of management's focus that could be spent working on ways to increase revenue and expand margins.
The best way to play Johnson & Johnson may be to buy in over time, enjoy the solid 3.6% dividend yield, and realize you're in good company.