Johnson & Johnson (JNJ), Pfizer Inc. (PFE): Large Cap Stocks Are Cheaper Than They Appear

Although you may quibble with my estimates of future free cash flow, it is clear that each company will generate enough cash over the next decade to make today’s price to earnings ratios seem higher than they really are. Pfizer Inc. (NYSE:PFE), in particular, tends to generate more cash than it reports in GAAP earnings. So, while it may seem like the market is pricing Merck at 24 times earnings, it is really priced much more reasonably.

However, none of these companies would be classified as a Charlie Munger “cannibal.” Merck has substantially increased its shares outstanding over the last decade, while Johnson & Johnson (NYSE:JNJ) and Pfizer Inc. (NYSE:PFE) have kept shares outstanding at about the same level. When there is ambiguity as to how cheaply a stock is priced, as is the case here, I would prefer to count on reductions in shares outstanding. As a result, I will wait for these stocks to get a little cheaper before diving in.

The article Large Cap Stocks Are Cheaper Than They Appear originally appeared on Fool.com.

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