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Prescription for Success?

Mac Greer, The Motley Fool

Shares of Johnson & Johnson (NYSE: JNJ) rise on strong earnings and solid growth in prescription drug sales. AT&T (NYSE: T) unloads its stake in Hulu. And Walmart (NYSE: WMT) announces a fashionable partnership with Kidbox.

In this episode of MarketFoolery, host Mac Greer is joined by analysts Emily Flippen and Jason Moser to discuss those stories and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on April 16, 2019.

Mac Greer: It's Tuesday, April 16th. Welcome to MarketFoolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Jason Moser and Emily Flippen. Welcome!

Jason Moser: Howdy!

Emily Flippen: Hey, good morning!

Greer: How are you feeling? 

Moser: I'm feeling great!

Greer: Walmart fashion is something we're going to talk about. We're going to talk about something that Walmart is doing in the fashion industry. We're going to talk about the future of Hulu. Jason, I know you're a big fan of Hulu. Things just got a little more interesting there. 

But we begin with Johnson & Johnson shares up around 2% today on stronger-than-expected quarterly earnings. More than half of J&J's revenue coming from prescription drug sales. Emily, prescription drug sales up by more than 4%.

Flippen: Yeah, it's an exciting day for J&J. I think a lot of investors and consumers really only know Johnson & Johnson for maybe Motrin, Tylenol, Neutrogena. But this is an increasingly small part of what Johnson & Johnson is doing. I think they're realizing that a lot of their growth is going to start coming from their prescription drug sales. It's interesting because for the most part, Johnson & Johnson has always been this consumer products company in the minds of consumers at least, but increasingly they're seeing that worldwide, the growth opportunity is in pharmaceutical sales. They've had great experience getting into that so far, despite the fact that there's increasing competition from generics. And that's not just in the U.S., but across the world. So it'll be interesting to see how they're able to compete as some of these patents let up and then we see generics start to flood the market. 

Greer: Jason?

Moser: We were talking a lot about Johnson & Johnson toward the end of last year when that whole talcum powder crisis erupted.

Flippen: [laughs] Crisis.

Moser: It was a legitimate crisis. We talk about childhood and things that you remember throughout your life, Johnson & Johnson's baby powder is one of those staples of your household, seems like. And then you find that perhaps this product has cancer-causing components. That's obviously not good. To your point, it's a consumer products company for most people. I think that's how most people at least recognize Johnson & Johnson. So to see them diversifying the business, becoming more of a pharmaceuticals company, I think is great. 

One thing that I'm fascinated by, I've been doing a lot of research into this augmented reality space --

Greer: Hold on. We're talking Johnson & Johnson, and you just used the phrase augmented reality.

Moser: It seems very odd to say.

Greer: Baby powder.

Moser: I did a double take initially when I found this, but I think it's important for investors to know. This is the type of company that Johnson & Johnson is becoming. It's more than just pharmaceuticals and talcum powder. They have a robotic surgery and medical device division. This is part of the business called Ethicon. They're acquiring more robotic surgery companies. Whenever we say robotic surgery, immediately people think of Intuitive Surgical. That's the one company that everybody recognizes. We've recommended it here in our Foolish universe and investors have won hugely from it. But Johnson & Johnson is pursuing more in that space as well. I think that you're going to find as time goes on, they will diversify their business away from just these pharmaceuticals, even, becoming more than just talcum powder. That's why, at the end of last year, we were talking about, that could be a very good time to actually buy the stock, when that headline first hit. Obviously, the stock tanked. It's looking like that probably was a pretty good time to buy the stock. Time will tell, obviously, but it seems like they're at least forward-thinking.

Greer: Let me ask you about that. The company is so diversified. Sounds like, becoming even more diversified. But when you look at the stock, it's lost to the market over the last one-, three-, and five-year periods. Now, if you go back 20 years or so, it has beaten the market. But when I look at a company like Johnson & Johnson, my question immediately goes to, am I better off just buying an index fund because this company is so diversified? So, for the long term, better off with J&J or an index fund?

Flippen: I'm a huge believer in index funds. I actually think when I look at Johnson & Johnson and use the phrase "such a diversified company," and that's not to say that it's not diversified, but still, 50% of its revenues come from pharmaceuticals, an area that's increasingly competitive and hard to compete in. That to me says, "Oh, there's a lot of dependencies there." Another quarter of that coming from consumer products, which has been steadily declining, also slightly concerned. Personally, I would pick an index fund hands-down over just buying Johnson & Johnson at this point. 

Moser: I agree. I own shares of an index fund. I don't own shares of Johnson & Johnson. 

Flippen: That's a lot!

Moser: Yeah, well, I'm pretty sure that the index fund actually owns Johnson & Johnson as well. It seems like you would want to own this company. We talk about the name all the time. It's something that's existed for all of our lives. But yeah, when you look at the actual track record, that is there. You can't really get around that. Perhaps there are good times to buy the stock when a crisis hits. But you have to time that, and I don't know that I'm really in the business of doing that. So I think I'm going to agree with Emily there. I'd probably just go with an index fund and relieve myself of any worry. 

Greer: Let's talk some Hulu. AT&T unloading its 9.5% stake in Hulu back to Hulu for around $1.4 billion. That values Hulu somewhere in the neighborhood of $15 billion. Now, Jason, I need you to untangle the knot that is Hulu. Here it goes. Ready? Disney (NYSE: DIS) currently has a 60% stake in Hulu. Comcast (NASDAQ: CMCSA), NBC Universal, 30% stake. And Disney and Comcast together will decide how they want to allocate the shares from AT&T. And this is where it gets interesting. Hulu currently includes some Comcast-owned networks like NBC and Universal and some AT&T-owned networks, like TBS and TNT. And, oh yeah, we have the whole Disney+ streaming service coming out in November. Where does all this leave Hulu?

Moser: It is a very tangled mess. I simplify it in that I think, ultimately, at the end of the day, Disney will own Hulu outright. I mean, we're only seeing that play out, right? They used to own a little bit of it. Now they own more of it.

Greer: They have a controlling stake. 

Moser: Exactly. As a Hulu subscriber, I don't know that Hulu was really ever that compelling of a product until they actually came out with the live offering. That, honestly, was when we first started subscribing to Hulu.

Greer: What does that include?

Moser: That essentially is basically cable. For those of you who have cable, you get all of those channels and you watch probably a fraction of them. That's ultimately what Hulu live is. It's a whittled down version, a condensed version, it's really the channels that most people watch the most of. But they essentially have taken that cable idea of bundling and just made the bundle a bit more relevant. For people who like sports, for people who like news, for people who want to watch TV where live matters, that is a very compelling offering because it does still completely separate you from the cable company. That's a nice thing to be separated from. Having no cable box is really a special thing. I'm not going to lie, Mac, I like it.

Greer: Along those lines, when we've been talking about Disney+, which will launch in November, a lot of people obviously make the comparison to Netflix and they ask, is it going to be a Netflix killer? How's that going to shake out? But if you combine Disney+ with some Hulu-type of offering and ESPN, then maybe we're asking the wrong question, right? Maybe Disney is really trying to win the whole living room. They are trying to go after the traditional cable companies, and maybe Netflix is too small -- I know that is a funny thing to say -- maybe we're thinking too narrowly by just focusing on Disney vs. Netflix.

Moser: I think maybe we have a spot on the investing team and Mac probably needs to join because you are asking the right question there. The whole narrative of like, "Is this a Netflix killer?" is killing me. That's a Jason killer. 

Greer: Why is that?

Moser: Listen, this whole over-the-top movement, streaming is the way people get their content. Now, it's not the exception. It's the norm. Netflix helped drive us there. They got us there. Regardless of what we may be getting as far as Hulu+ and Disney+ and ESPN, anybody's guess. But I think at the end of the day, Netflix is always going to be one of those subscriptions that people just want to have in their home. It's cheap, it's easy. That's the thing, people are familiar with it. They have developed a brand identity. You can go there and find something. I don't think the content is all that great personally, but hey, we're subscribers still. I don't think it's a Netflix killer. I think really, the traditional cable relationship is now probably on its way out. 

Flippen: This conversation is killing me a little bit. We're sitting here talking about how great streaming services are. We're not going to mention the fact that AT&T is selling their stake? For what? Do you know what they're going to do with the proceeds? Did you see? Use it to pay down debt.

Moser: Oh, nice!

Flippen: How tragic it must be to be AT&T!

Greer: That seems fiscally responsible. 

Flippen: They're taking investment from something that is -- while I don't think anybody is going to say Hulu is as compelling as Netflix or Disney+, it's still a growing area, arguably an area you're going to get better returns than whatever you're paying on your debt right now! You're going to sell it off and then pay down your debt?! What is AT&T thinking?!

Moser: I'm going to have to look this up right now because I don't know the actual AT&T debt load. I've got to imagine it's pretty big. 

Flippen: But this is not the way to service it! If you're selling off valuable assets for the purposes of serving your debt, that to me says a lot more about the status of AT&T right now than it does Hulu. 

Greer: Let me take the flip side of that. If Hulu is going to change, let's say a year from now, two years from now, it doesn't have some of this AT&T-owned content. It doesn't have some of this NBC-owned content. Then AT&T, this is the time to get out of your Hulu stake.

Flippen: I guess so. But if you're AT&T, what are you going to do? Do you think they really have anything that is as valuable alone as it was combined with a service like Hulu? 

Moser: Emily may think I'm disagreeing with her; I actually totally agree with her on this. To service their debt load from this sale...the analogy of the thimble and the ocean. It's virtually meaningless. Just looking it up now on Cap IQ, their total debt stands at around $180 billion. This is going to be utterly meaningless. It just gets them out of something that is not going to matter to them any which way you look at it. With Verizon, with AT&T, these are wireless businesses at the end of the day. These are not cable companies anymore. Their cable divisions are eroding. They're now figuring out ways to distribute the content that they do have ownership of. They were never going to get full ownership of Hulu, so it never mattered to begin with. Disney is a far better company. This is Disney's forte. They own all of this content. AT&T I think just recognized that to continue investing in Hulu was just going to be basically writing a check out to Disney on a quarterly basis and not getting anything for it. I don't begrudge them for doing it. But what are they going to do with that money? Paying down the debt, it's nothing whatsoever.

Flippen: Nothing that's going to return any value.

Greer: Maybe they can help Apple out. I get this growing sense that Apple's streaming service --

Flippen: If AT&T is coming to Apple's help here, I think Apple has bigger concerns.

Moser: You've seen Bob Iger's comments on Apple's streaming business. Iger is on Apple's board. He's asked questions about Apple's streaming service and he essentially just said it's immaterial. It's not even a part of their business. I bet you right now, Tim Cook covets that Disney content move. Hulu, ESPN+, Disney+. Tim Cook is probably looking right now and wondering how big of a check he could write to just buy Disney outright.

Greer: That was the talk a few years ago, right? 

Moser: Well, he probably should have should have been talking about doing it then. Iger is on his way out. He's finally actually committed. I think 2020, is that it? 

Flippen: I'm not holding my breath. 

Moser: [laughs] You don't think? Maybe. I don't know. But obviously, that check would have to be a lot bigger now. 

Greer: Maybe if you're Tim Cook, you go to Iger and you're like, "Hey, I noticed AT&T just sold a 9.5% stake in Hulu. How about if we buy that 9.5% stake?"

Moser: It makes the problem worse, ultimately. Just taints a relationship that seems to be working OK, at least if you're a Disney shareholder. 

Greer: We'll keep an eye on it, and we will try to avoid using the term Netflix killer.

Moser: Please, please do. 

Greer: OK. Our final story here. Walmart getting into the "subscription box for apparel" game. On Tuesday, Walmart announcing a partnership with Kidbox. The new Walmart Kidbox Style Box will offer four to five fashion items for around $48, which is around 50% off the suggested retail price for that group of bundled items. Emily, this strikes me as a Stitch Fix for kids. 

Flippen: In a lot of ways, it's competing with Stitch Fix for the same audience here except for its priced at an arguably lower price point. The business model is a bit different, though. You either pay $48 and keep all of the box, which contains four to five items and comes once a season -- so it's aimed at back-to-school seasons or holidays seasons; or you don't take anything and you get a full refund of your $48. The business models are different. But, it's still buying into this idea of using a box service to buy clothes. 

It's interesting because Walmart for a long time now has been trying to build out a strong apparel presence. They've been losing to companies like Target, for instance, which did an amazing job not only bringing different brands in, but building out their in-house brands. Walmart's definitely trying to do this, trying to go a little bit more upscale with their retail clothing. 

My only concern is, we have seen companies come into the box service and just continue to fail. Think Nordstrom with Trunk Club. They've been losing money on Trunk Club for a long time now. We saw Gap try to do a kid and babies box service, and then 14 months later pull out. Even Stitch Fix is struggling in this space and they're much more than just kids' boxes. But Walmart has scale. They're bringing it out for a trial run. We'll see how well Kidbox does. But I do think that it's not supposed to be value in itself, it's supposed to be value in the sense of Walmart building out a stronger apparel presence. This is just one of the many facets.

Greer: You mentioned all those different companies trying and failing, or struggling at least. Why is that? What is it about this idea that has not quite taken?

Flippen: I have many theories. One of my largest theories is, it's more expensive than shopping. A lot of people who are willing to pay more for their clothes like to have the experience of picking out and trying on the clothes themselves. When they go with a box service, maybe they're not getting exactly what they want. I think there's a subset of people who are willing to continue to pay for them. But for the most part, I expect that they're one-off purchases that people subscribe to for a short period of time, then cancel over the long term when they realize that they're just paying $X for very little value added. A box like Kidbox is not that same model. It's an opt-in rather than an opt-out. So it'll be interesting to see how many people who shop at Walmart are willing to pay $50 for a box of four or five items when they could probably go to Walmart's shelves themselves and buy these clothes cheaper. 

Moser: We talk a lot about, from an investor's perspective, fashion is fleeting. That's what makes these investments so difficult, investing in pure-play fashion companies. They're hot and that's great, but when they're not, boy, are they not, and it's tough to get it back. For Walmart, this is a pretty easy bet to make. If it totally fails, it's not going to affect their business whatsoever. If it succeeds, it'll affect their business a little bit. It'll be good. But it's not going to be anything that makes or breaks the company either which way.

Greer: So a little bet.

Moser: A little bet. We have fun with that. 

Flippen: A kid-sized bet.

Greer: A kid-sized bet. Jason, you just mentioned that fashion is fleeting. Along those lines, I want to ask both of you all about some fleeting fashion. When you look back on your early years, when you look back on your time as a kid and what you wore as a kid, does anything stand out? 

Flippen: I had some quality blunder years when I was a kid. I was a little bit of a rebel. I didn't like to wear what other kids were wearing. So I protested jeans for a very long time. I wore instead these mid-rise gaucho pants, back when gaucho was really in style. Occasionally, I think about getting back into it. I mean, they were comfortable. Now, I've unfortunately given into the jean craze. But gauchos, man! They need to come back!

Greer: Mid-rise gaucho pants.

Flippen: Yeah, at my shin.

Greer: As a statement. 

Flippen: My parents were embarrassed to go out with me. It was flipped around in our family. 

Greer: Jason?

Moser: I've played golf all my life so I've been probably just a walking fashion nightmare by virtue of that alone. I see pictures of when I was a little kid, two or three years old. I'm not trying to throw this completely on my parents, but I saw these pictures of me in this sun outfit, this weird, is it a dress? Is it a onesie? I can't figure out exactly what it is.

Greer: It sounds comfortable, I will say that.

Flippen: It sounds like something your parents probably got in a Kidbox.

Moser: Probably! I'm sure it made their day a lot easier to just throw me in that and not worry about it. I look at these pictures today and I'm thinking, man, what the hell were they thinking? That's pure "make fun of Jason" material right there. I think I actually have a picture that I'll be happy to tweet out in reference to this so that people can make fun of me.

Flippen: That's commitment!

Moser: This was one of those things where you're like, "Oh, my God!" I didn't make that choice. I don't think I would have made that choice if I was given the option. But man, oh, man, what were they thinking?

Greer: You're not getting that in Kidbox. 

Moser: No, no. If you are, Kidbox isn't...

Flippen: Yeah, that's how we'll determine the value of this to Walmart.

Greer: Well, for me, I had this combination -- and I can't blame my parents for this, I picked this out. I had green toughskins that I would wear with a green silk shirt that had this scene of the Amazon and I'd tuck it in real tight. And I had a leather belt with a Liberty Bell, huge belt buckle. This will shock you, but looking back, I don't think it worked. 

Moser: But look at where you are today. I mean, you're working here, lovely wife, two kids. I mean, really, it all worked out. 

Greer: But I'm still a bit of a slob. I'm still a bit fashion challenged. I think it's fair to say.

OK, the desert island question. If you're on a desert island for the next five years, you have nothing going on, so you have to basically buy one of these stocks. You have nothing going on. And you have to own it for the next five years. We have J&J, AT&T, Disney, Comcast, Walmart. Let's throw all those in the mix. What do we like? 

Flippen: I'm going to go a little bit out of the box here. I'm going to say Walmart. I think there's a lot of potential for Walmart, it has amazing staying power. I would say Disney, but I think we've been hitting people over the head with Disney a little too much recently. So I'm going to go with Walmart and remind people that this is a really well-run company. They're doing a lot to build out their mobile presence, their delivery presence, their pickup presence. Retail, obviously, apparel is a big part of that value proposition. I think Walmart is run smartly, and I think it's going to be here for the long term. 

Moser: I'm going to go completely against what I said earlier and go with Johnson & Johnson. I mean, this is the desert island question. 

Greer: I like it!

Moser: I guess my logic here is that healthcare is something that is always going to be needed. Whether it's consumer-facing, pharmaceuticals, robotic surgery. You have to admire the market itself. It does seem like they are forward-thinking in the investments that they're making. So maybe I'll give J&J a shot.

Greer: Jason, Emily, thanks for joining me! MarketFoolery will be back on Monday. We're taking a few days off here. The market is closed on Friday for Good Friday. But if you get a chance, check out some of our other Motley Fool podcasts at podcast.fool.com. We've got Rule Breaker Investing with David Gardner. We've got Motley Fool Answers with Motley Fool retirement expert Robert Brokamp and Alison Southwick. We've got a little show called Industry Focus, a guy named Jason Moser is on it?

Moser: I host one of them.

Greer: Tell me about that. What am I getting there? 

Moser: The nice thing about Industry Focus is, we're focusing on industries. Really, that's what it's all about. It's about getting the industry and putting the focus in the industry. 

Flippen: My mind is blown!

Moser: [laughs] I know! It's a lot of fun, I must say. Monday is the Financials show. Tuesday, Consumer Goods; Wednesday, Healthcare; Thursday, Energy; Friday, Tech. So you're getting a little bit of a lot of good stuff week in and week out.

Greer: It sounds very focused!

Moser: It is. We've got a lot of focus. 

Greer: And we've, of course, got our weekly flagship podcast, Motley Fool Money. Please check those out, podcast.fool.com.

As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we will see you on Monday!

Emily Flippen has no position in any of the stocks mentioned. Jason Moser owns shares of AAPL and Walt Disney. Mac Greer owns shares of AAPL, NFLX, and Walt Disney. The Motley Fool owns shares of and recommends AAPL, ISRG, NFLX, SFIX, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends Comcast, JWN, and VZ. The Motley Fool has a disclosure policy.