Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of Merck (MRK) ended Friday's trading session with modest losses of 0.3%. The global health care company reported its third quarter results before the market open.

Third Quarter Results

Merck reported third quarter revenues of $11.49 billion, down 4.4% on the year. On average, analysts expected the firm to generate revenues of $11.57 billion.

Non-GAAP earnings rose by less than 1% to $2.93 billion, or $0.96 per share. Non-GAAP earnings per share beat analysts consensus by three cents. GAAP net earnings rose 2% to $1.73 billion, or $0.56 per share. As usual, the difference between both profit metrics is largely explained by acquisition-related costs.

CEO and Chairman Kenneth C. Frazier commented on the results, "Our strong global sales this quarter offset the impact of the SINGULAIR patent expiry in the US. We will continue to drive value for our customers and shareholders through Merck's four-part strategy of executing on our core business, expanding geographically in high-growth markets, extending our complementary businesses and managing our costs while investing for growth."

Segmental Information

Pharmaceutical sales fell by 5% to $9.9 billion. Weakness was driven by a 55% decline in SINGULAIR revenues to $602 million. SINGULAIR has lost exclusivity in the US in August of this year, and will lose exclusivity in the beginning of 2013 in Europe.

Other declining drugs were VYTORIN, COZAAR and REMICADE. Strong performance was shown by JANUVIA, GARDASIL, JANUMET and ISENTRESS.

Outlook

For the full year of 2012, Merck now anticipates non-GAAP earnings per share between $3.78-$3.82 per share. GAAP earnings per share are expected to come in between $2.08 and $2.24 per share.

Full year revenues are expected to come in unchanged from 2011s annual revenues. At current exchange rates, revenue growth is impacted by 1% in the fourth quarter and 2% for the full year.

CEO Kennth C. Frazier comments on the future, "With our robust pipeline, we remain on target to submit multiple new products for marketing approval between now and the end of 2013, including suvorexant for insomnia, odanacatib for osteoporosis and TEDAPTIVE for multiple lipid parameters."

Valuation

Merck did not provide a consolidated balance sheet for its third quarter. At the end of the second quarter, the company held $17.5 billion in cash, equivalents and short term investments. The company operates with $19.0 billion in short and long term debt for a modest net debt position of $1.5 billion.

For the first nine months of 2012, Merck generated revenues of $35.5 billion. The company reported a net income of $5.3 billion, or $1.71 per diluted share. Full year revenues are anticipated at $48 billion. Full year revenues could total $6.7 billion, or around $2.16 per share.

The market currently values Merck at $141 billion. This values the firm at 2.9 times annual revenues. The market values the firm at 21-22 times annual earnings.

Currently, Merck pays a quarterly dividend of $0.42 per share, for an annual dividend yield of 3.6%.

Investment Thesis

Year to date, shares of Merck have risen some 22%. Shares traded in the high thirties for the first half of 2012 and recently rallied to highs of $48, currently exchanging hands at $46 per share.

Over the past five years, shares have fallen some 20% from $60 in 2008 to lows of $25 in 2009. Shares recovered to mid-thirties and rallied further recently. Between 2008 and 2012, Merck has doubled annual revenues from $23.8 billion in 2008, to an expected $48 billion in 2012. Revenues fell from $7.8 billion to an estimated $6.7 billion.

Revenue growth was driven by the $41 billion acquisition of Schering-Plough in 2009. The deal caused quite some dilution, but Merck estimated that annual cost synergies would total $3.5 billion by 2011. The rationale for the deal makes sense, as it leaves Merck with a much better diversified operation, as it lowers the dependency on incidental Blockbusters.

Merck offers an excellent investment opportunity for shareholders. The company pays a decent 3.6% dividend yield and the firm operates without any significant net debt position. This leaves the company in a strong condition to continue to pay this dividend yield in the future.

The dividend could be accompanied by further capital gains if Merck can boost its revenue growth profile. Further integration of current businesses could lower acquisition and restructuring costs, to further boost the bottom line.

Source: Merck - Safe And Strong Dividend Yield