Weekly Wrap: Competition Ahead for Johnson & Johnson

Jeremy Glaser: Netflix soars, competition ahead for Johnson & Johnson, and Goldman goes direct to consumers. This time on the Morningstar Weekly Wrap.

Johnson & Johnson had slightly better than expected results. But Damien Conover sees competition looming.

Damien Conover: Johnson & Johnson reported a solid third-quarter results, however there is increasing concerns over several of its products that are facing near-term patent losses. In particular Remicade, which is about 10% of total sales, is facing biosimilar competition really over the next few weeks here that we think will be worse than what consensus is anticipating. So we still view the stock as slightly overvalued, and despite a strong quarterly result the stock did sell off partly due to those upcoming concerns about patent losses.

Glaser: Netflix beat its own low guidance on new subscribers in the quarter sending shares soaring. But Neil Macker thinks the stock looks expensive.

Neil Macker: Netflix reported its third-quarter earnings this week. The firm beat its own low guidance for subscriber adds in both the U.S. and international segments due to customer interest in original content. However the company provided weak U.S. subscriber guidance for the fourth quarter due to continued grandfathering issues for older accounts. As we previously discussed, U.S. net adds continued to decline faster than expected. The current guidance for the fourth quarter implies a 25% annual decline in total net adds in 2016 versus a 1% decline in 2015 and a 9% decline in 2014. While we currently model a 10% average decline in total net adds from 2017 to 2020, our projections may prove to be optimistic and problematic for the company. 

If management is correct that outperformance in the third quarter stemmed from excitement around original content and that issues with grandfathering led to the previously weak performance, Netflix will need to continue to ramp up investment in original content. This will occur without being able to raise its prices sharply, thus pressuring margins. We are maintaining our narrow moat rating and $69 fair value estimate for Netflix. With shares trading in 2-star territory [the stock has since fallen into 1-star range] investors should wait before putting new money to work.

Glaser: Goldman Sachs reported a decent quarter, and Michel Wong thinks there is some opportunity in the bank's direct-to-consumer loan platform Marcus.

Michael Wong: Goldman Sachs recently launched its online consumer lending platform, Marcus. And we believe that this imitative can move the needle for the company. This is a practically unimaginable event, that likely wouldn’t have occurred except for the more recent developments in financial technology and changes in consumer demographics. This push by Goldman Sachs is part of a large trend for many financial institutions. They have to find what to do with all of their deposits and excess capital. We've seen other pushes into lending products and interest-rate related revenue streams from companies such as Morgan Stanley, Stifel Financial, Raymond James Financial, Charles Schwab, and TD Ameritrade. And if we were to look at trying to size this opportunity, what is it like for Goldman Sachs? Currently Goldman Sachs has about $120 billion of deposits with only about $50 billion of that in loans. That means they may be able to shift about $70 billion of those deposits into loans with those loans likely yielding somewhere in the high single digits into the teens. This is in comparison to their cash yields which are likely less than 50 basis points and yield on fixed-income securities or bonds that are likely 2% to 4% only.

Glaser: And in case you missed it, John Rekenthaler's column this week looks at how the 4% retirement withdrawal rule has fared from 1900 on, across the world.