Domain: Finance
Question:
Analyze the valuation and financial performance of Johnson & Johnson (JNJ) relative to its broader peer set, which includes the following competitors: Pfizer (PFE), Merck (MRK), Medtronic (MDT), and Procter & Gamble (PG). The time period under consideration is from FY 2023 to FY 2024. The output will consist of two main sections. (For 2023, use the following stock prices: JNJ = $149.44; PFE = $25.75; MRK = $104.17; MDT = $84.43; PG = $143.44. For 2024, use JNJ = $140.99; PFE = $25.07; MRK = $96.56; MDT = $76.50; PG = $159.89.) 

Rounding instructions: For multiples or percentages, use exact values as the inputs for calculations, but show outputs rounded to the nearest decimal place (e.g., if the YoY growth for a required calculation is 79.93%, present the variance as 80.0%. If a P/E multiple is 14.123x, the output should be 14.1x.). For bps, use exact values as inputs for calculations, but show outputs should round to the nearest 10 bps (e.g., if the reported net margin changed by 157 bps YoY, present the answer as 160 bps). Lastly, with regards to calculating and displaying raw dollar amounts, use exact values as the inputs for calculations, but show outputs in billions of dollars, rounded to one decimal place, unless that output is less than a billion dollars. If a dollar amount is less than a billion dollars, output the result in millions of dollars, rounded to zero decimal places. 

The first main section should be titled "High-Level Comps" and is mostly qualitative in nature. Provide a summary that answers the questions below:

--How does JNJ's P/E multiple compare to its peer average? (Note: if any of JNJ's peers have significant outlier performance, then also provide a comparison for how JNJ's valuation compares to a normalized peer set, which excludes the companies flagged as outliers. Also, for each company identified as an outlier, briefly explain what drove the anamolous results.)
--Did JNJ's reported net margin outperform the peer average YoY? List the 1-2 most important, high-level drivers on the I/S for JNJ. (Note: if any of JNJ's peers have significant outlier performance, then also provide a comparison for how JNJ's financial performance compares to a normalized peer set, which excludes the companies flagged as outliers. This summary can either compare JNJ to the new average excluding the outliers, or compare JNJ to each of the remaining companies in the revised peer set. To the extent it's not repetitive with the preceding text, briefly explain what drove the anamolous results for the companies identified as outliers.)

The second main section should be titled "Supporting Detail", which will provide a mix of qualitative and quantitative outputs. Subsections should include the following:

--"Relative valuation": summarize how JNJ's valuation compares to the broader peer set. Underneath, include a table that orders the companies based on how undervalued the stock is. (For example, if JNJ has the lowest P/E multiple, it would be listed first). From left to right, the columns should be: Company Name, Ticker, P/E, P/B, EV/EBITDA. Only include the FY 2024 metrics (Note: the EBITDA calculation should also exclude other income and restructuring costs)
--"Financial performance": analyze the profitability and margin performance for each company, and draw a conclusion of how well JNJ performed on a relative basis. Underneath, include a table that orders the companies based on performance. (For example, if JNJ has the highest TTM adjusted EPS growth, it would be listed first). From left to right, the columns should be: Company Name, Ticker, Adj. EPS Growth %, ROE, ROA, Adjusted Net Margin. Only include the FY 2024 metrics.
--"Debt and coverage analysis": provide a high-level summary of how JNJ compares to its peers using the following metrics: debt/equity, debt/assets, and interest coverage ratio (Note: the interest coverage ratio should use EBITDA as the numerator)
--"Cash flow analysis": Begin with a summary of how JNJ compares to the broader peer set in terms of the YoY change in free cash flow. Address the extent to which CFO, CFF, or CIO were key drivers, along with brief support. (Note: to calculate free cash flow, use CFO - CapEx. If "Capital Expenditures" is not explicitly stated, then use PP&E.)

Expected points in a correct answer:
States JNJ's 2024 P/E multiple is 24.4x.
States the peer average 2024 P/E multiple is 21.6x.
Since JNJ's 2024 P/E multiple of 24.4x is higher than the peer average 2024 P/E of 21.6x, conclude that JNJ is moderately overvalued relative to its peers.
States JNJ's P/E declined by 15.3% on a YoY basis.
States the peer average P/E declined 90.0% on a YoY basis.
Identifies the decline of MRK's P/E multiple from 744.1x to 14.3x as skewing the industry's superior improvement.
Identifies lower charges for business development activity as a reason for MRK's P/E decline.
Identifies the favorable effect of foreign exchange as a reason for MRK's P/E decline.
Calculates the peer average P/E multiple rises to 24.0x by removing MRK from the peer set.
States JNJ's 2024 reported net margin of 15.8% improved 20 bps YoY.
States the broader peer set average adjusted net margin improved 860 bps.
Identifies Pfizer's 2024 YoY reported net margin improved by 910 bps.
Identifies cycling $6.2B of inventory write-offs as the driver for Pfizer's improvement.
Concludes the change for JNJ's reported net margin from 15.6% to 15.8% is superior to its remaining rivals after removing the margin performance for Merck and Pfizer.
Identifies 82.4% lower COVID-19 vaccine sales as a driver of Johnson & Johnson's underperformance.
Identifies 14.2% higher expense for R&D as a driver of Johnson & Johnson's underperformance.
When comparing JNJ to its four peers, state JNJ's 2024 P/E multiple is ranked third in terms of attractive valuation.
When comparing JNJ to its four peers, state JNJ's 2024 P/B multiple is ranked third in terms of attractive valuation.
When comparing JNJ to its four peers, state JNJ's 2024 EV/EBITDA multiple is ranked third in terms of attractive valuation.
States Johnson & Johnson's 2024 P/B is $4.8x.
Using FY 2024 results, state Johnson & Johnson's EV/EBITDA is $13.6x.
When comparing JNJ to its four peers, state JNJ's 2024 YoY adjusted EPS growth is ranked fourth in terms of favorable performance.
When comparing JNJ to its four peers, state JNJ's 2024 ROE is ranked third in terms of favorable performance.
When comparing JNJ to its four peers, state JNJ's 2024 ROA is ranked third in terms of favorable performance.
When comparing JNJ to its four peers, state JNJ's 2024 adjusted net margin is ranked third in terms of favorable performance.
Using FY 2024 results, state Johnson & Johnson's Adj. EPS Growth % is 0.6%.
Using FY 2024 results, state Johnson & Johnson's ROE is 19.7%.
Using FY 2024 results, state Johnson & Johnson's ROA is 7.8%.
Using FY 2024 results, state Johnson & Johnson's Adj. Net Margin is 27.3%.
Comments on JNJ's risk profile relative to its peers
States JNJ's debt/assets ratio remained at 0.2x from 2023 to 2024.
States the peer average Debt/Assets ratio of 0.3x also held flat from 2023 to 2024.
States JNJ's debt/equity ratio improved modestly over this time frame, declining from 0.5x to 0.4x.
States the peer average Debt/Equity ratio of 0.7x also held flat from 2023 to 2024.
Comments on JNJ's ability to pay off debt relative to its peers
States the company's interest coverage ratio remained roughly flat from FY 2023 to FY 2024.
States the peer average Interest Coverage ratio went from 12.7x in 2023 to 14.8x in 2024.
States Johnson and Johnson's free cash flow increased from $18.3B to $19.8B from 2023 to 2024.
Calculates the YoY increase (from FY 2023 to FY 2024) for JNJ's free cash flow as an 8.7% increase.
States the average 2024 YoY change in Free Cash Flow among the peer set is 53.7%.
Identifies JNJ's relatively low growth of 6.5% for CFO as a key factor.
States the average YoY change in CFO among the peer set is 36.4%.
Identifies 2,218.3% lower cash inflows from investing activities as a key factor.
Identifies JNJ's materially lower net income growth as an underlying driver for CFO.
Identifies an $890M reduction of asset write-downs as an underlying driver for JNJ's YoY CFO variance.
States JNJ's reduction of asset write-downs was a decline of 68.7%.
Identifies $15.1B spent on acquisitions as a driver for JNJ's signicantly lower CFI.
Identifies $16.9B lower sales from investments as a driver for JNJ's signicantly lower CFI.
Identifies JNJ's $9.2B lower purchases of investments as a partial offset for CFI.
When analyzing how JNJ's reported net margin performance compares to its peers, identify MRK as an outlier, generating YoY reported net margin improvement of 2,610 bps.
Compare JNJ's reported margin performance to the decline of MDT's reported net margin (from 12.0% to ~11.4%) and the decline of PG's reported net margin (from 17.9% to 17.7%).
Identifies Pfizer's 2024 YoY reported net margin performance as an outlier relative to its peer set.
When comparing MRK to its four peers, state MRK's 2024 P/E multiple is ranked fifth in terms of attractive valuation.
When comparing MRK to its four peers, state MRK's 2024 P/B multiple is ranked second in terms of attractive valuation.
When comparing MRK to its four peers, state MRK's 2024 EV/EBITDA multiple is ranked fourth in terms of attractive valuation.
When comparing PFE to its four peers, state PFE's 2024 P/E multiple is ranked fourth in terms of attractive valuation.
When comparing PFE to its four peers, state PFE's 2024 P/B multiple is ranked fifth in terms of attractive valuation.
When comparing PFE to its four peers, state PFE's 2024 EV/EBITDA multiple is ranked fifth in terms of attractive valuation.
When comparing PG to its four peers, state PG's 2024 P/E multiple is ranked second in terms of attractive valuation.
When comparing PG to its four peers, state PG's 2024 P/B multiple is ranked first in terms of attractive valuation.
When comparing PG to its four peers, state PG's 2024 EV/EBITDA multiple is ranked first in terms of attractive valuation.
When comparing MDT to its four peers, state MDT's 2024 P/E multiple is ranked first in terms of attractive valuation.
When comparing MDT to its four peers, state MDT's 2024 P/B multiple is ranked fourth in terms of attractive valuation.
When comparing MDT to its four peers, state MDT's 2024 EV/EBITDA multiple is ranked second in terms of attractive valuation.
When comparing MRK to its four peers, state MRK's 2024 YoY adjusted EPS growth is ranked first in terms of favorable performance.
When comparing MRK to its four peers, state MRK's 2024 ROE is ranked first in terms of favorable performance.
When comparing MRK to its four peers, state MRK's 2024 ROA is ranked first in terms of favorable performance.
When comparing MRK to its four peers, state MRK's 2024 adjusted net margin is ranked first in terms of favorable performance.
When comparing PFE to its four peers, state PFE's 2024 YoY adjusted EPS growth is ranked second in terms of favorable performance.
When comparing PFE to its four peers, state PFE's 2024 ROE is ranked fourth in terms of favorable performance.
When comparing PFE to its four peers, state PFE's 2024 ROA is ranked fifth in terms of favorable performance.
When comparing PFE to its four peers, state PFE's 2024 adjusted net margin is ranked second in terms of favorable performance.
When comparing PG to its four peers, state PG's 2024 YoY adjusted EPS growth is ranked third in terms of favorable performance.
When comparing PG to its four peers, state PG's 2024 ROE is ranked second in terms of favorable performance.
When comparing PG to its four peers, state PG's 2024 ROA is ranked second in terms of favorable performance.
When comparing PG to its four peers, state PG's 2024 adjusted net margin is ranked fifth in terms of favorable performance.
When comparing MDT to its four peers, state MDT's 2024 YoY adjusted EPS growth is ranked fifth in terms of favorable performance.
When comparing MDT to its four peers, state MDT's 2024 ROE is ranked fifth in terms of favorable performance.
When comparing MDT to its four peers, state MDT's 2024 ROA is ranked fourth in terms of favorable performance.
When comparing MDT to its four peers, state MDT's 2024 adjusted net margin is ranked fourth in terms of favorable performance.