Merck’s First Quarter Report Substantiates View of Vytorin Overreaction
Posted on Tuesday, April 22nd, 2008 | In Stocks to WatchBack in February I wrote that Vytorin worries looked overdone and concluded that Merck (MRK) shares especially looked attractive. Since then the stock has dropped further (MRK is down 32% year-to-date as shown by the chart below), but yesterday’s earnings report from the company leaves my prior view unchanged.
Merck reported first quarter earnings of $0.89 per share, three cents above estimates. They also reiterated their 2008 profit view of $3.33 per share. So, MRK shares have lost a third of their value this year but Vytorin losses are not expected to meaningfully impact their earnings. Such a dichotomy makes me even more confident of my previous assertions.
Merck has lowered its 2008 projections for its share of income from the cholesterol joint venture which sells both Vytorin and Zetia by $700 million to account for the negative ENHANCE study results. While it may be too early in the year to know exactly if such a cut is enough, the fact that a $700 million hit leaves earnings guidance unchanged shows that Merck is not overly dependent on these two products.
In fact, being conservative and using the company’s low end of guidance for the joint venture, these two drugs will only represent 9% of Merck’s 2008 sales. Given they can adjust their cost structure (staff, marketing, manufacturing capacity, etc) quickly to reflect lower revenue expectations, it is not difficult to see how $700 million can have only a modest impact on overall profitability.
Merck shares today fetch $39 each, down from $57 at the outset of the year. The stock trades at less than 12 times this year’s expected earnings and yields more than 4%. Yesterday’s report did nothing to sway my view from back in February. The MRK sell off still appears overdone.
Full Disclosure: Long shares of Merck at the time of writing
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 About Chad Brand (http://www.peridotcapitalist.com)
Chad Brand is the Founder and President of Peridot Capital Management LLC, an independent investment advisory firm based in St. Louis, Missouri. In addition to managing investment portfolios for clients, Chad writes "The Peridot Capitalist," an investment blog that has been named one of the best stock market blogs on the web and is regularly quoted on sites such as Forbes.com, TheStreet.com and Yahoo! Finance. Prior to founding Peridot, Brand graduated from Washington University in St. Louis and worked in the corporate finance department at Express Scripts, Inc, an $18 billion per year pharmacy benefits management company. |
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