Stocks made gains after Federal Reserve Chairman Jerome Powell testified before the U.S. Senate, setting expectations for a continuation of the Fed's gradual approach to raising interest rate. The Dow Jones Industrial Average (DJINDICES: ^DJI) and the S&P 500 (SNPINDEX: ^GSPC) opened the session lower but rose during morning trading.
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Materials stocks led the market, with the Materials Select Sector SPDR ETF (NYSEMKT: XLB) adding 1.3%. Home construction stocks rose on Powell's comments about strong economic growth and moderate inflation; the iShares US Home Construction ETF (NYSEMKT: ITB) jumped 2.3%.
As for individual stocks, Netflix (NASDAQ: NFLX) fell on a slowdown in new subscriptions, and Johnson & Johnson (NYSE: JNJ) beat earnings expectations due to strong drug sales.
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Netflix subscriber additions slow
Shares of Netflex plunged 5.2% after the company beat profit expectations but reported that subscriber additions came in well under previous guidance. Revenue increased 40.3% to $3.91 billion, slightly below the $3.94 billion analysts were expecting. Earnings per share jumped from $0.15 to $0.85, exceeding expectations for $0.79. The closely watched metric of subscriber additions, which observers consider indicative of future business growth, came in at 5.15 million new subscribers, compared with the company's forecast of 6.2 million, given last quarter.
While net subscriber additions were roughly flat with the period last year, the number of paying members added actually increased from 4.67 million added in Q2 2017 to 5.45 million added last quarter. Operating margin was 11.8%, but the company said that operating margin for the full year will come in toward the low end of its previous guidance of 10% to 11%, due to a stronger dollar. Free cash flow was a negative $559 million compared with an outflow of $608 million in Q2 last year, as the company continues to invest heavily in new content.
Looking forward, Netflix expects to add 5 million net subscribers in Q3, down from 5.3 million in Q3 2017. Paid net additions are forecast to increase by 5.2 million as compared with 5 million last year.
Netflix shares opened down 13.4% but recovered most of that during the day as investors considered some of the positive news in the report.
Johnson & Johnson reports strong drug sales growth
Johnson & Johnson reported second-quarter earnings that beat expectations, thanks to a strong performance by its pharmaceutical division, and the stock jumped 3.5%. Sales grew 10.8% to $20.8 billion and adjusted earnings per share increased 14.8% to $2.10. Analysts were expecting the healthcare giant to earn $2.07 per share on sales of $20.4 billion.
Pharmaceutical sales soared 19.9%, including a 2.3% boost from currency effects. Excluding the effect of acquisitions and divestitures, pharma sales grew 11%, with domestic sales up 10.2% and international up 11.9%. Strong growth in sales of immunology drug Stelara more than offset the decline of Remicade, and sales of oncology drugs, led by Zytiga and Darzalex, grew 38.7% operationally.
The weak spot in Johnson & Johnson's results continues to be its consumer business, which had a sales decline of 0.4% excluding currency. Sales by the medical device segment increased 1.9% operationally.
Last week a jury awarded plaintiffs a $4.7 billion judgment against Johnson & Johnson over allegations that its talc-based products cause cancer. The company plans to appeal the decision, but the negative publicity may be affecting consumer sales. Meanwhile, J&J; exhibited enough strength from the rest of its businesses to renew investor interest today.
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Jim Crumly owns shares of Johnson & Johnson and Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool owns shares of Johnson & Johnson. The Motley Fool has a disclosure policy.