Shortly after the Vioxx fiasco about three years ago, Merck & Co (NYSE: MRK) stock took a dive, and many analysts thought it would be down for the count, with potential losses from litigation running into the tens of billions of dollars. Some analyst reports thought the losses could reach as high $50 billion.
Looking back now, I am glad I bought it when it was down and I am glad I kept it after its run-up. About six months ago, after Merck continued to make progress in defending itself against the thousands of pending lawsuits, I penned Merck shareholders dancing in street; new ones join in! As long as you continue to educate yourself about business and investing, you will continue to read about the importance of good management in the longterm success of a company. More than any other, Merck has been voted the top-managed company in the world, yet the stock dropped immediately as traders and fair-weather friends ran.
Well, those that looked closer can be proud of the current state of the company, as Merck again has reported better-than-expected earnings results. The company said it earned $1.53 billion, or 70 cents per share, compared with $941 million, or 43 cents per share, in the year-ago period when it took a $598 million charge for legal expenses related to its withdrawn Vioxx arthritis drug.
Merck is not the screaming buy it has been in the past, but it is another strong stock to put on your watch list. Some positive things to consider:
- Strong management
- Dividend yield of 2.86 (among the high end of S&P 500)
- Improving line of drugs coming on line
- 20% profit margins
- Strong cash flow and over $5 billion in cash and short term investments
- ROE of 25%
Why the watch list and not the buy list? I look for deep value, and Merck is near its 52-week high of $55.14 (trading intraday at $54) and has a P/E over 24. The P/S, P/B and P/CF all seem just plain pricey, so I can wait. However, this one-time dog is now the Big Dog when you look at the pharmaceutical landscape: Amgen (NASDAQ: AMGN) is in the dumps, Pfizer (NYSE: PFE) reported losses, and others are just treading water. Congratulations are in order for Merck - but not a stock order, not today.
To find potential opportunities and verify my track record, read Chasing Value or Serious Money.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
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