Merck Could Surprise Wall Street

05/06/2011 4:55 pm EST


Jim Jubak

Founder and Editor,

It was a small milestone, but an important one: On April 29, Merck (MRK) reported that first-quarter revenue increased by 1% from the first quarter of 2010, as increased sales from new products offset losses to generic competition.

Yes, Merck has finally worked its way through many of the patent expirations that have killed sales, as the company’s best-selling drugs lost market share to new, cheaper generics. The company now faces just one major patent loss in the next five years: the 2012 expiration of Singulair.

And for the first time in ages, this year Merck looks likely to launch more new drugs than it loses to patent expiration and generic competition: Boceprevir for hepatitis C (On April 27, an FDA panel voted 18-0 for approval), and Saflutan for ophthalmic treatment.

I’m not talking about a company that’s about to tear up the track. Merck did indeed raise its guidance for 2011 when it reported on April 29, but it only raised its projection of 2011 earnings to between $3.66 and $3.76, from a prior range of $3.64 to $3.76.

And much of the company’s earnings growth in 2011 will come from cost cutting, as the company continues its integration with Schering-Plough, a 2009 acquisition.

But I am talking about a company that has a good chance to surprise Wall Street with relatively modest good performance, in part because expectations are so low. Earnings per share in the first quarter grew by just 11% from the year-ago quarter, but the 92 cents a share the company earned was still a big 8 cents better than the consensus.

And the fact that so much growth comes from internal sources—cost cutting—is a big plus if the economy does indeed slow in 2011. Those earnings will be safely predictable at a time when investors seem to be looking for safety. Merck’s shares were up 9.9% in the 30 days that ended on May 4.

Add in the stock’s 4.15% dividend yield, and I think this is a good package if you’re worried about this market (or just want to collect a good dividend with some gains in stock price as well).

Which may be why I’m adding it to my Dividend Income portfolio today.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of Merck as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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