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Weekly Wrap: Johnson & Johnson Not Best Value in Healthcare

Fri, 21 Apr 2017

First-quarter earnings for the healthcare firm reinforce that it is not the best buy. Plus, slow growth for IBM, and Netflix is overvalued.

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Video Transcript

Jeremy Glaser: Johnson & Johnson not the best value in healthcare; IBM aims to find its footing; and Netflix is still pricey. This time on the Morningstar Weekly Wrap.

Johnson & Johnson reported this week, and Morningstar's Damien Conover sees the results as further evidence investors should look elsewhere in the sector.

Damien Conover: Johnson & Johnson reported first-quarter earnings which were largely in line with our expectations, however there were some growth concerns coming out of the consumer division and some pricing concerns coming out of the drug division. Both of these are in line with our expectations, and it's a major reason why we feel the stock is slightly overvalued right now. It is in contrast to our valuations on a lot of the other drug firms right now, so despite some of the challenges that Johnson & Johnson is facing that came out in the first-quarter results, we anticipate the remainder of the drug industry to post relatively steady results, and we continue to see a lot of valuation opportunities within the large-cap pharmaceutical industry. A couple of the stocks that we're highlighting are Eli Lilly, Pfizer, and Bristol Myers, all three of which we think are well positioned for growth and the valuation on the firms look underappreciated, so despite some of the pricing pressure that Johnson & Johnson showed in its quarter, we anticipate relatively steady sailing for a lot of these other big pharmaceutical firms.

Glaser: IBM's push toward higher potential areas continues, but analyst Andrew Lange still expects slow growth.

Andrew Lange: On Tuesday, IBM reported its first-quarter results. The firm's first quarter continued to reflect its ongoing shift to higher growth and higher margin strategic imperatives in order to mitigate low or declining growth from legacy businesses. However, headwinds in legacy areas remain a growth drag, and are expected to be a burden as IBM strides to generate positive mid- to long-term revenue growth. We've forecast very modest top-line revenue growth for IBM from fiscal 2018 onward as strategic imperatives grow in magnitude. Partnership momentum for Watson healthcare, Internet of things, and financial services supports IBM's long-term investments in this area, however the long-term economics and returns of these Watson businesses remains ambiguous. We think IBM's growing services exposure to less commoditized digital services, and investments in sales and delivery capacity should help stabilize this important services business. Finally, with new systems products expected to be out later this year, we are expecting an improved performance in this business in the second half.

Glaser: Netflix shares slipped after the firm posted a mixed first quarter. Subscriber growth came in below expectations, but they did issue upbeat guidance for next quarter. Despite the pullback, analyst Neil Macker still sees shares as considerably overvalued. He remains concerned that the ramp-up in original content investment will increase pressure on margins over time.

In case you missed it on Morningstar.com this week, Karen Wallace looked at why bond prices are going up, even as the Fed is raising rates.

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