Earnings: Goldman Sachs | JNJ | Netflix

19 April 2023

Goldman Sachs

Goldman Sachs reported a ~19% drop in profits as dealmaking + bond sales dropped considerably. We wrote y’day that we saw this as a key area of concern – alongside the consumer banking division, which continues to be “scaled down” (this is a euphemism for abject failure, though CEO David Solomon carries it off with pizzazz – credit to him for that). Goldmans saw a $470M loss from the sale of some consumer banking loans, whilst the Global Banking division saw $8.44B in revenues – investment banking fees were down while equities held up. Not a bad quarter as the company continues to go “back to its knitting” – upgrading to NEUTRAL. Net earrings of $3.23B are still nothing to sneeze at, whilst a 11.6% ROE is respectable given the main engine of earnings for the bank are its dealmaking division, which has been parked in neutral. We’re looking to upgrade the bank to BUY when it starts trading at or below book value – $310.48 per share. To us that feels like a nice time to pick up the best dealmakers on Wall St at the bottom of the cycle – patience is a virtue, and all that…we are patient. 


Johnson & Johnson

Johnson and Johnson reported strong earnings – revenue grew 5.6% to $24.7B with particularly strong performance in the consumer division – (+7.4% growth). The company settled its long-running talcum powder lawsuit which resulted in a loss of $0.03 cents per share – stripped of that one-time lawsuit charge (~$6.9B) the company made $2.68 per share (+0.4% from the comparable quarter). Consider for a second how remarkable it is that the company can settle a multi-billion dollar lawsuit and the net result is a one-time loss of three cents per share to shareholders. We’re reiterating a buy here – strong results all around – credit where credit’s due to the consumer division, which saw strong sales from Tylenol and Motrin – people are still going to get sick after Covid. Pharma sales were strong too – mostly from cancer products and inflammatory reduction meds. Shareholders will be relieved to see the back of the talcum powder lawsuit – it clears the way for another good quarter of sales and the clean spin-off of the consumer goods division. RETAIN BUY.


Netflix (NFLX.NASDAQ)

Netflix shares initially slumped but then soon recovered in after-hours trade after reporting their 2023 first quarter result after the bell. Netflix announced it will delay its strict crackdown on password sharing delaying the potential revenue growth. The company has said more than 100 million households share accounts, or about 43% of its global user base.

Global paying subscriber numbers grew +4.9% from last year to 232.5m, with difference regions having mixed results, US/Canada reported +9% growth, and Latin America grew by +3%, however EMEA and Asia Pacific saw subscriber numbers drop, the latter falling -13%.

We believe Netflix is nearing peak subscriber levels and wonder what is next for the company, and if password sharing and ad supported subscriptions will help improve profitability. Trading at above ~20x earnings we feel is rich due to lack of growth and remain Neutral Rated. We keep saying this – but why buy Netflix at 20x when you can buy Disney at 18x or WarnerBrothersDiscovery at 15x?


New Zealand

The New Zealand market (NZX50, -0.4%) fell as inflation concerns saw wholesale rates creep higher impacting defensive stocks which are sensitive to interest rates.

REINZ data highlights sustained NZ house price weakness with prices down another -0.8% in March, taking the decline since the November 2021 peak to 16.8%. The news was not well received by retirement village operators and local REITs, with Summerset hitting a 32-month low. Catching falling knives? Still like Summerset at the “quality” pick in the sector – we’re avoiding expensive REITS like Goodman Property Trust.


Australia

The Australian market (ASX200, -0.3%) following the RBA’s April policy meeting minutes release which suggests room for one more hike, following its first pause in rate hikes after ten consecutive raises.

The purpose of the pause was “to allow time to gather more information” and it was “clear that monetary policy may need to be tightened at subsequent meetings”. The tone of the minutes was more hawkish than expected and suggested that the May meeting was “live”, for which the Bank would have more data on inflation, the labour market, household spending and business conditions, and a full set of updated forecasts. Energy was the worst performing sector, as LNG prices halved from its peak in August 2022, as most sectors traded in the red.


US

Fox settled its defamation lawsuit with Dominion Voting Systems for $787M – this feels like a tipping point to us for the titular Rupert Murdoch vehicle — the 92 year old has been attempting to combine Fox with WSJ-owner News Corp for a long time; but Fox News might just be too radical to combine into the more sober-leaning News Corp.

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