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June 15, 1999
Merck & Co. for Dad
Yet again, I have to apologize for last year's present, Dad. You've always taught me to learn from my mistakes, so here is my lesson learned from last year: Be careful with companies that are heavily dependent on commodity prices since they have little to no pricing power and are at the whim of their markets. Next -- First Citizens Bancorp. from TMFRalegh
* A Stock for Dad represents the opinion of one Fool and in no way should be taken as the opinion of either The Motley Fool, Inc., the company in question, or representative of anyone or anything else other than that specific Fool's thoughts.
by Paul Larson ([email protected])
Trading at $66 as of June 14, 1999
With that in mind, let's move forward and put something in your portfolio that you can hold for years and watch grow. Despite my urge to give you something really saucy having to do with the Internet, this year you're getting a chip as blue as they come -- Merck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %>. Here's a company that has rewarded longtime shareholders quite handsomely while adding incalculable value for its customers and the world.
Merck is the largest U.S. drug company and is roughly tied with Glaxo Wellcome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %> as the biggest pharmaceutical firm in the world. While I like Merck in particular, I think there are numerous reasons to be interested in the overall drug industry today. First, the Federal Drug Administration (FDA) has streamlined its drug approval process, which means drug companies can recoup their research investments more quickly and they also have more time on the patent clock to reap profits. Moreover, the country as a whole is getting older, and demand for all types of drug treatments is only set to rise over the coming years.
Not a one-trick pony, Merck has a wide array of compounds in its portfolio. Perhaps you will recognize some of the drugs listed below, perhaps not. Either way, here are a handful of Merck's more salient products and what they treat:
Zocor - High Cholesterol
Mevacor - High Cholesterol
Crixivan - AIDS, other viral infections
Vasotec - Hypertension
Cozaar - Hypertension
Prinivil - Hypertension
Propecia - Baldness
Pepcid - Heartburn/Ulcers
Singulair - Asthma
Aggrasat - Heart Attacks
Fosamax - Osteoporosis
Maxalt - Migraine Headaches
Vioxx - Arthritis/Acute Pain
Wondering how the sales are doing by category? Click here to see a table from the company's latest 10-Q.
I know you're a numbers guy, Pops, so here's a snapshot of what Merck has accomplished over the past few years:
1998 1997 1996 1995 1994 1993
Revenue $26.9B $23.6B $19.8B $16.7B $15.0B $10.5B
Net Inc. $5.2B $4.6B $3.9B $3.3B $3.0B $2.2B
EPS $2.15 $1.87 $1.56 $1.32 $1.17 $0.93
Div. Pd. $0.95 $0.85 $0.71 $0.62 $0.57 $0.52
A fairly impressive showing, no? While historical results are no guarantee of future performance, we Fools think it's a pretty darn good indicator. In short, I'm betting that Merck's success will continue.
As you continue to get a little grayer, Dad, I'm sure you'll appreciate the current income that Merck pays in the form of a dividend. The stock, as of this writing, yields 1.5%, and the dividend has been increased every year going back to 1986.
Let's now talk about what could go wrong with this investment. Probably the largest risk factor to consider with Merck is the fact that several of the company's blockbuster drugs, namely Pepcid and Vasotec, are about to lose their patent protection. Vasotec has less than a year left on the clock, while Pepcid has about 18 months. Nevertheless, drugs have continually gone off-patent in Merck's history, yet the company still has been able to post the above impressive growth.
Out with the old and in with the new has always been the status quo in the drug market. While sales may be lost from the drugs that are going off patent protection, there are plenty of new drugs that will pick up the slack. Probably the most promising is the newly released Vioxx. This is a drug that has been dubbed a "super aspirin" since it has many of the painkilling and anti-inflammatory effects of aspirin without the stomach problems that traditional aspirins can cause. There is a similar drug on the market, Monsanto's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> Celebrex, but Vioxx is the only one indicated for use in treating generalized pain.
Vioxx is not the only new drug that Merck has recently developed. The company has released no less than 14 new drugs over the past four years, and many more are on the way. The company is on track to spend $1.8 billion this year on research and development, and it's a fairly safe bet that at least a few of the literally dozens of drugs in the pipeline will "score."
Another risk to consider is the company's valuation. At over 30x trailing earnings and with $2.78 per share in earnings expected two years out, Merck is not exactly in the bargain basement. (But then again, last year's pick had trailing and forward P/E ratios well into the single digits and look where that got us!) Regardless, the drug group as a whole is still priced at a premium, even though it has shown recent weakness on Wall Street. Merck may bob around in the short term, but I have little doubt that Merck's slow and steady growth will have the stock price significantly higher in a couple of years.
Merck is such a large company that I can't possibly come close to covering all the issues that need to be considered before an investment is made. Swing by the company's website, tool around for a while, and let me know what you think, Dad. If Merck doesn't fit your tastes, there are plenty of other drug companies out there that you may like.
Happy Father's Day!
Merck Company Information:
Trades on the NYSE under the symbol MRK
Merck's website: www.merck.com
Current Quote
Merck's Chart
Other Related Links:
Merck Dueling Fools -- 11/10/98