Zeev- Abelson agrees about value. Fm. this week's Barron's
"POOR MERCK. UNLIKE THE OTHER drug makers, it didn't get to celebrate passage of Medicare's new prescription-drug feature that could mean a lot more dough in the companies' coffers. Or, at least, its stock didn't get to participate in the little party investors threw for the group when Congress voted yea before scrambling for the exit.
Since none of the senators or representatives who gave the bill a thumbs-up or thumbs-down actually read it before doing so and hence were a bit cloudy on what it really contained, to say nothing of what effect it might have, their comments were more than usually uninformative. Nonetheless, since the pharmaceutical industry, which has many virtues but altruism is not salient among them, was one of the unacknowledged architects of the new law, we feel safe in hazarding the measure will do it no harm.
But investors are sour on Merck, so last week, it had to stand out in the cold, its face pressed to the window, enviously watching the other drug stocks whoop it up. As if things weren't bad enough, The Wall Street Journal on Friday ran a front-page feature on the company, which was one long tale of woe. And undeniably, Merck has had some punk luck lately: Two of its presumed promising drugs in late-stage development -- one for treating diabetes and the other for depression -- were withdrawn in just a matter of weeks.
What we learned from the Journal story was that the Street's knock on Merck, punk luck aside, is that the company retains a heavy commitment to research, has implicit trust in its scientists, shuns gussying up old drugs in new guises and isn't eager to merge with Schering-Plough. All of which we perversely find quite admirable.
It's a rare drug company that doesn't hit a rough patch and incur Wall Street's displeasure. But, after perusing the Journal story, which, incidentally, was a neat job of describing why everyone's so down on Merck, and leafing through analysts' reports (most of them less than enthusiastic), the company's third-quarter report and the transcript of the conference call that followed its release, we think Merck's a buy.
The stock's selling at 40 and change, just about its lowest price in six years and its meagerest multiple in eight. It's also at less than half the highs reached a scant few years ago, when it traded in the mid-90s. Yet, even though you'd never know it listening to the growling and howling from the peanut gallery, the company's not going out of business, its balance sheet is healthy, it's still earning money and quite a bit of it, and its pipeline of drugs, believe it or not, is not empty.
The estimates for this year run $2.90-$2.95 and maybe $3, a bit more, for next. That gives Merck a P/E of around 13, the lowest among the top dozen drug producers, most of which sport multiples at least twice as large. Without blinking recent research stumbles or the fact that one of its major formulations is slated to come off patent in 2006, the company boasts some likely-looking products on tap, notably a cervical cancer vaccine now in Phase III trials that Tim Anderson, Prudential's analyst, says could be a $3 billion number and hit the market sooner than expected.
In any case, whatever happened to the notion of buying stocks when they're down? That went out of fashion, we supposed, about the same time the idea of investigating before you invest did."
