Common Stock Analysis Checklist 

Once I have found a stock that looks promising based on a few simple ratios (price to earnings, price to book, return on equity, past earnings growth), the procedure I follow in evaluating a company varies from business to business, but the general format I try to stick to is:

1. Look through the financials. The purpose is to try and show mathematically that the business is a good one relative to its price. I then create a range of what the entire business would be worth if I looked solely at the statistical exhibit.The data and ratios I typically look at are:

a. Profitability of the business (the amount of cash that the business can generate and put to use for the owners’ benefit, profit margin, return on invested capital, etc).b. Historic growth in intrinsic value (an eyeball guess based on the past changes in earnings, equity, assets, and stock price over the long-term).c. Financial condition (current ratio; debt to equity; for smaller companies, debt due within the next few years versus liquid assets; etc).d. Dividend and the effectiveness of reinvested earnings.e. Other data and ratios (historic shares outstanding, oil reserves, segment growth, etc).

That a company’s worth can be proven mathematically is an essential factor in being able to call it an investment – essential, but not sufficient. Hence:

2. Examine the qualitative aspects: industry standards, management, the business’s economics (such as dependency on commodity prices, business volume, the nature of competition and regulation in the industry), and so on. One question to answer that I feel is important is how I would feel if I had to compete against the company I’m looking at, assuming that I had adequate capital capital resources, personnel, experience, and such.

After I have taken into consideration all relevant factors in order to conceive a range for what the business is worth, compared the company’s intrinsic value to the price, explored alternative uses for the investment capital, and after having concluded that the investment can safely be called an investment (as opposed to a speculation); I begin to reach a decision. If the business passes all of the above tests and the company’s intrinsic value has a sufficient margin of safety over the price (in case my analysis was wrong), then typically I would make a purchase.

Johnson & Johnson Analysis 

10 Reasons I Own Johnson & Johnson Stock

By Jack Huddleston, 7/8/2010

Johnson & Johnson (NYSE: JNJ) sells consumer products (a long list of registered brand names such as Johnson’s baby products, Neutrogena, Tylenol, Listerine, Band-Aid, Splenda and many others), prescription medicine products (mostly for cardiovascular and metabolic disease,

immunology, infectious diseases, neuroscience and oncology) and medical devices and diagnostics (a broad range of surgical equipment, diagnostic testing equipment and medical devices). (1)

As of July 6, 2010, JNJ sold for $59.08 per share with a 1 year Target Estimate of $70.47, a 52 week Range of $55.71 – $66.20, a Forward Annual Dividend Yield of 3.70%, P/E (ttm) of 12.41, Market Cap of $162.95B, Total Debt (mrq) of $12.59B, Revenue (ttm) of $62.50B, Operating Cash Flow (ttm) of $17.43B, Levered Free Cash Flow (ttm) of $9.88B, Operating Margin (ttm) of 27.03% and Profit Margin (ttm) of 21.26% (2)

Below are 10 reasons I own JNJ:

1. Long History and Ability to Weather Recessions. The company was founded in 1886 and went public in 1944 (1). JNJ has survived for over 120 years.

2. Earnings Per Share Have Increased For 10 Straight Years. Over the 10 year period from 2000-2009, EPS increased from $1.70 to $4.63. EPS increased every year and the average annual increase was 12.13% over the ten year period. In 2007, EPS were $4.15, $4.57 in 2008 and $4.63 in 2009. (3)

3. In 2009, Operating Margin and Net Margin Equaled the 10 Year High and Have Been Stable for 10 Years. Over the 10 year period from 2000 to 2009, Operating Margin stayed in a range of 27.4% (2000) to 31.6% (2009) and in the past 5 years has not been below 28.7%. Over the 10 year period, Net Margin stayed in a range of 16.5% (2000) to 20.9% (2009) and in the past 5 years has not been below 19.8%.(3)

4. Management thinks of shareholders as co-owners, cuts costs effectively, and allocates capital efficiently.

5. Diversification. In 2009, consumer goods accounted for 26% of revenues and 15% of operating profits, pharmaceutical goods accounted for 36% of revenues and 39% of operating profits, and medical devices and diagnostic equipment accounted for 38% of revenues and 46% of operating profits.

6. P/E Far Below the 10 Year Average. In 2000 the average P/E was 26.4 and it was recently 12.41. The 10 year average annual P/E ratio is 19.43. The recent P/E of 12.41 is 36% below the average P/E for the 10 year period from 2000 – 2009. (3)(2)

7. The Price is Currently Depressed Due to Recent Slow Growth.Earnings growth slowed in 2007 and was negative in 2009. This has kept JNJ’s price lower than it would normally be. As the chart below shows, the earnings growth rate from 2002-2006 averaged 15% and has averaged 13.5% over the past 25 years, including the 2007-2009 period.

8. High and Stable Dividends. At a price of $59 the Forward Annual Dividend Yield is 3.7%. (2) The company’s website shows that the dividend has been paid continuously for 38 years and management has faithfully adhered to a policy of increasing the dividend annually by 10-19%. The average annual increase since 1972 has been 15%. The percent of profits paid out in dividends in 2009 was 44% (1).

9. Low Debt and Strong Cash Flow. JNJs Total Debt is only $12.59B (mrq), Operating Cash Flow (ttm) was $17.43B and Levered Free Cash Flow (ttm) was $9.88B (2).

10. Johnson & Johnson is an Internationally Recognized Brand.

JNJ is a great company with low debt. At a P/E of 12.41 and with a dividend yield higher than long-term treasury bonds, I think JNJ is a good value and a safe investment for these uncertain times

Sources:

(1) JNJ website(2) Yahoo Finance(3) Value Line

Disclosure: I own JNJ

Kraft Analysis 

What I Like and Don’t Like About Kraft

By Jack Huddleston, 7/8/2010

Kraft Foods Inc. (NYSE: KFT) is the largest branded food and beverage company headquartered in the U.S. and the second largest worldwide. The company markets some of America’s best known food brands such as Kraft, Oscar Meyer, Nabisco, Maxwell House, Jell-O, Planters, Ritz Crackers, Oreo Cookies, and Kool-Aid.. Its products are sold in more than 160 countries. Kraft completed the acquisition of Cadbury in March 2010 for about $20.8 billion in cash and stock. Kraft says the deal “creates a global powerhouse in snacks, confectionery and quick meals” and expects significant cost savings and synergies that will increase revenue (1)(6).

As of July 6, 2010, KFT sold for $28.25 per share with a 1 year Target Estimate of $33.65, a 52 week Range of $25.41 – $31.09, a Forward Annual Dividend Yield of 4.20%, P/E (ttm) of 10.12, a Market Cap of $49.25B, Total Debt (mrq) of $31.04B, Revenue (ttm) of $42.72B, Operating Cash Flow (ttm) of $4.66B, Levered Free Cash Flow (ttm) of $4.89B, Operating Margin (ttm) of 13.87% and Profit Margin (ttm) of 9.93%. (5)

What I Like About Kraft:

1. Many Great Brands with Huge Name Recognition. Kraft’s products are present in more than 99 percent of U.S. households. Kraft has approximately 70 brands with annual revenues over $100 million and 11 brands with revenues over $1 billion (Cadbury, Nabisco, Maxwell House and Oscar Mayer are a few). Kraft, Jacobs, LU, Maxwell House, Cadbury, Trident, Milka, Nabisco, Oreo, Philadelphia, and Oscar Mayer). (1)

2. A Dominant Industry Position. Kraft is the world’s second largest food company with annual revenues of $48 billion. Over 80% of its revenues come from products that hold the No. 1 share position in their respective categories, and more than 50% of its revenue comes from categories where its market share is twice the size of the nearest competitor. More than 40 of its brands are over 100 years old. As a result of the Cadbury acquisition, Kraft has tripled its share of the global chocolate and candy market to about 15% of the total market. (1)

3. Balanced North American and International Sales. With the Cadbury acquisition, 49% of sales are in North America, 25% in Europe and 26% in Developing Markets.

4. Economies of Scale and Cost Savings Due to the Cadbury Acquisition. Kraft believes the Cadbury acquisition will create new revenue and savings opportunities. Revenue synergies are expected from an aggressive move into emerging international markets, like China and India, where Cadbury already has a strong presence. Cost savings of at least $675 million are expected over the first few years from facility consolidation and economies of scale. Kraft expects the combined company to deliver long-term organic net revenue growth of 5% or more and EPS growth of 9 to 11%. Kraft has said that one of the key benefits of buying Cadbury is its distribution infrastructure in the India market, and India is now one of Kraft’s 10 focus markets. In addition, Kraft plans to use Cadbury’s strength in U.S. convenience stores to sell more snack products. (1) (5)

5. Large and Stable Dividend. Kraft has paid a quarterly dividend since 2001 when it began trading on the New York Stock Exchange and the company says “we intend to pay regular quarterly dividends on our Class A common stock.” The first quarterly dividend was $0.13 per share in the third quarter of 2001 and has been $0.29 for the past 8 quarters, but it has never decreased. Although the dividend growth rate slowed beginning in 2008, from 2002-2007 it grew at an annual compounded rate of 13%. The current Forward Annual Dividend Yield is 4.20% (1) (2)

6. 5. Management Treats Shareholders as Co-Owners.

Concerns I Have About Kraft:

1. The Food Industry is very competitive. Kraft has great brands but faces increasing competition from lower-priced private label products, some of which are of such high quality that they earn consumer loyalty and are effective competitors.

2. I am concerned that Warren Buffett thinks Kraft overpaid for Cadbury. I have great respect for Mr. Buffett and don’t doubt that he is correct. However, even if they overpaid, Kraft was believed by Buffett and others to be significantly undervalued and that provides a margin of safety in case Kraft isn’t able to achieve all the advantages they hope the Cadbury acquisition will provide.

I think Kraft will maintain its value and pay a 4.2% dividend yield, and in this economy I’m happy with that for the next few years. Over the long-term I expect Kraft to be a good investment.

Sources:(1) http://www.kraftfoodscompany.com(2) Yahoo Finance(3) Data collected from Kraft’s 2009, 2004, and 2001 10-K statements.(4) Kraft’s Q1 10-Q for 2010.(5) Value Line(6) Bloomberg Reports

Disclosure: I own WMT

Wal-Mart Analysis 

11 Reasons I Own Wal-Mart Stock

By Jack Huddleston, 7/8/2010

Wal-Mart Stores, Inc. (NYSE: WMT) is the world’s largest retailer serving customers and members more than 200 million times per week at more than 8,446 retail units under 55 different banners in 15 countries. Wal-Mart had fiscal year 2010 revenues of $408 billion and employs more than 2.1 million associates worldwide. (The fiscal year ends Jan.31). (1) (3)

As of July 6, 2010, WMT sold for $48.57 per share with a 1 year Target Estimate of $61.60, a 52 week Range of $47.35 – $56.27, a Forward Annual Dividend Yield of 2.50%, P/E (ttm) of 12.74, Market Cap of $180.18B, Total Debt (mrq) of $46.98B, Revenue (ttm) of $413.82B, Operating Cash Flow (ttm) of $23.65B, Levered Free Cash Flow (ttm) of $12.00B, Operating Margin (ttm) of 6.06% and Profit Margin (ttm) of 3.54%. EPS (ttm) were $3.81. Average Analyst Estimates of EPS for 2010 (as of January 2011) are $ 4.01 (low of $ 3.88 and high of $ 4.11) and for 2011 (as of January 2012) are $4.40 (low of $4.14 and high of $4.64). (2)

Below are 11 reasons I own Wal-Mart stock:

1. Wal-Mart is the Biggest. Wal-Mart is the world’s largest retailer. That gives them HUGE buying power and they know how to use that advantage.

2. They are Very Effective at Beating Up Suppliers to Get the Best Prices, Terms and Service. Some retailers make decisions based on relationships, back-scratching and even kick-backs. At Wal-Mart it is strictly the bottom line and they are very, very tough. They enjoy beating up suppliers to get a better deal than anyone else.

3. Their Corporate Culture Perfectly Suits Their Business Model. No frills. Always cost conscious. Never forget Sam Walton. Constantly seeking ways to do things better, faster and cheaper. Very tough. Very smart.

4. Barriers to Entry Give Them a Moat. No one could duplicate their locations.

5. Long History of Consecutive Dividends. Wal-Mart first paid dividends in 1974 and has paid them regularly since. Management has followed a policy of increasing dividends every four quarters.(1) Over the ten year period from 2000-2009 the dividend per share increased at an average annual rate of 19%. The Average Annual Dividend Yield increased from 0.4% in 2000 to 2.1% in 2009.(3) The current Forward Annual Dividend Yield is 2.50% and 28% of earnings are being paid out as dividends.(1)

6. P/E Far Below the 10 Year Average. Over the 10 year period from 2000-2009, the P/E averaged 23.2. In 2000 the Average P/E Ratio was 38. The P/E (ttm) on July 6, 2010 was 12.74. (3)

7. Stable EPS and Net Profit Margin. Over the 10 year period from 2000-2009, EPS increased from $1.40 to $3.66. EPS increased every year and the average annual increase was 11.16% over the ten year period.(3). In 2007, EPS were $3.16, $3.42 in 2008 and $3.66 in 2009. During the same ten year period (2000-2009) the average annual Net Profit Margin was 3.4% and the range was from 3.1% (2001) to 3.6% (2004). In 2008 the Net Profit Margin was 3.4% and in 2009 it was 3.5%. Over the nine year period from 2000-2009, Wal-Mart’s revenues increased at an average annual rate of 9.4%.

8. Wal-Mart is Innovative. Their innovations are well known.

9. They Have a “Cheap” Mentality and Are Proud Of It. They are based in Bentonville Arkansas and do the best job in the industry of keeping costs low. If they ever move to New York I will sell.

10. I Can’t Think of a Single Way They Are Vulnerable. They provide staples that we must have and aren’t vulnerable to technological change. For example, I don’t see any way they could suffer the fate of AOL or Blockbuster.

11. They Can Survive Tough Times. In this recession people are shopping at Wal-Mart for groceries who didn’t shop there during better times. Revenue growth has slowed, but I have no doubt that Wal-Mart will survive.

(1). Wal-Mart website(2) Yahoo Finance(3). Value Line

Disclosure: I own WMT