When writing articles like this I can only include a picture of a live fully functioning graph. Therefore, I have arranged to have a live fully functioning F.A.S.T. Graphs™ available to readers. Next I will offer a few simple calculations utilizing the Forecasting Calculators and their calculating functionality. However, the calculators allow me to run numerous “what-if” calculations based on various assumptions. If the reader follows the below link they will be able to quickly and easily run as many of their own calculations as they desire.
Here is the link for a FAST and FUN Preview of F.A.S.T Graphs using the stock symbol JNJ
Once you follow the link, scroll down to the Forecasting Calculators where you will find five calculators that can be utilized to estimate the future return potential on Johnson & Johnson (NYSE:JNJ). Each calculator is color-coded and the following screenshot illustrates how to access each calculator. My first calculation will be based on utilizing Johnson & Johnson’s normal P/E ratio of 15 (the dark blue tab and border).
The calculator is presenting forecasts based on the consensus analyst estimates reporting to S&P Capital IQ. With this Johnson & Johnson example there are 23 analysts forecasting earnings for fiscal year-end December 2016 and 25 analysts forecasting earnings for fiscal year-end 2017. From there, the number of analysts drops off to 17 analysts for fiscal year-end 2018 and only 11 analyst for fiscal year-end 2019. This information is found at the bottom of the graph as “# Analysts.”
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Assuming that these analysts are reasonably correct, and the company’s stock price was valued at a normal P/E ratio of 15.3 (red circle), then Johnson & Johnson would be expected to deliver a total annualized rate of return of only 3.57% out to December 31, 2019. Personally, I would consider this too low of a rate of return potential which is due to moderately high current valuation. I consider this, as I will elaborate later, my most reasonable case scenario.
In contrast, if I ran these calculations utilizing the long-term historical normal P/E ratio of 20.1 (red circle), the investment in Johnson & Johnson looks a lot more attractive. Although I would consider this a possibility, my confidence that Johnson & Johnson would trade at that valuation is low. Therefore, I would consider this more of an optimistic or best case scenario. Nevertheless, the 11.97% total annual rate of return would be considered attractive.
At this point, I’ve run these expected and best case scenarios utilizing the specific consensus analyst estimates over the next few years. However, many investors hold a rather jaundice view of the accuracy of analyst estimates. On some companies these negative views on analyst estimates are justified, however, there are certain companies where the analysts’ track records have been exceptional. Johnson & Johnson happens to be one of those companies that analysts have tended to estimate correctly.
The following “Analyst Scorecard” summary shows that analysts have been accurate with their forecasts on Johnson & Johnson virtually 100% of the time. This record assumes a 10% margin of error for forecasts made one year in advance, and a 20% margin of error for forecasts made two years in advance.
