Merck: A "Rational" Favorite

02/14/2003 12:00 am EST


Jamie Dlugosch

Editor, The Rational Investor

"With respect to investing, buying low is your best defense in facing the market's struggle," says Jamie Dlugosch . "If you have done your homework and have acquired shares at cheap prices, then declines in price should be viewed as temporary." Given his positive long-term outlook, the editor of The Rational Investor has added drug maker Merck to his long-term portfolio.

"One of the largest US companies with over $50 billion in sales, Merck & Co. (MRK NYSE) is the maker of leading drugs such as Zocor and Mevacor for cholesterol reduction and Vasotec and Prinivil for treating hypertension. Over the last three years MRK has seen its shares fall in value by 50%. While 2002 profits were flat, possibly justifying the decrease in valuation, the company expects 2003 profits to grow substantially as a result of sales from newer drugs. Having survived the expiration of its patent on Mevacor, MRK now expects 2003 profits to increase by 10.5%. MRK is now trading for 17 times current year earnings and less than 15 times estimates for fiscal year 2004 (ending January 2004). With the company expecting to pay down debt with the sale of its Medco unit sometime in 2003, the company is positioning itself to have many strong years ahead.

"Merck's five largest selling drugs, Zocor, Fosamax, Cozaar/Hyzaar, Singulair and Vioxx collectively saw sales increase by 18% in the most recent quarter. MRK is nearing the end of a difficult period when inexpensive generic competitors have overwhelmed some of its biggest selling drugs. The company is in the middle of human trials for several of its newer medicines, including a diarrhea vaccine for children, medicines for genital warts, depression and arthritis pain. Although regulatory risk may inhibit quick expansion of MRK's share price, buying the company today represents an opportunity for long-term investors. The combination of a 2% plus dividend yield with double digit earnings growth makes for an attractive investment situation. Elimination of the dividend tax makes MRK all the more attractive."

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