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creditsuisse - 30 January 2007 Americas/United States...

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IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS AND INFORMATION ON TRADE ALERTS AND ANALYST MODEL PORTFOLIOS ARE IN THE DISCLOSURE APPENDIX. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Credit Suisse in the United States can receive independent, third party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.credit-suisse.com/ir or call 1 877 291 2683 or email [email protected] to request a copy of this research. 30 January 2007 Americas/United States Equity Research Major Pharmaceuticals / MARKET WEIGHT Merck & Co. (MRK) COMPANY UPDATE Gardasil and Januvia Lead Strong Revenues Merck’s 4Q:2006 results were highlighted by impressive revenue performance, at $6.04 Bn vs. our estimate of $5.40 Bn and consensus of $5.38 Bn. However, $238 MM of this $644 MM outperformance was due to “other” revenues, which may be perceived by investors as lower quality as their sustainability is difficult to assess. That said, MRK’s key new products, Gardasil and Januvia, posted strong revenues above our expectations. These products are central to the company’s growth over the next several years, and their successful uptake is a critical milepost for market confidence in MRK. Certain aspects of MRK’s accounting treatment seemed inconsistent, as we have found at times in the past. MRK includes Vioxx and Fosamax reserve charges, but excludes these from guidance, which has the effect of reducing 2005 EPS and boosting ‘05-‘10 EPS CAGR – a metric to which MRK frequently refers. We see reserve charges as nonrecurring items and not indicative of operating performance, so we exclude them from adjusted EPS. Our EPS estimates are revised from $2.59 to $2.58 in 2007 and from $2.79 to $2.73 in 2008. Our target price is increased from $45 to $46, as we roll forward our earnings period for valuation purposes from 4Q:07 – 3Q:08 to FY2008. Our new $46 target price is based on a 17.5x multiple applied to 2008 EPS of $2.73. This multiple assumes a 7.5% premium to the sector. Share price performance 32 37 42 47 Jan-06 Apr-06 Jul-06 Oct-06 Daily Jan 30, 2006 - Jan 29, 2007, 1/30/06 = US$34.46 Price Indexed S&P 500 On 01/29/07 the S&P 500 index closed at 1,428.82 Quarterly EPS Q1 Q2 Q3 Q4 2006A 0.78 0.73 0.68 0.53 2007E 0.57 0.60 0.74 0.68 2008E 0.66 0.67 0.79 0.61 Financial and valuation metrics Year 12/06A 12/07E 12/08E EPS (CS adj., US$) 2.73 2.58 2.73 Prev. EPS (US$) 2.59 2.79 P/E (x) 16.4 17.4 16.5 P/E rel. (%) 106.1 122.4 124.1 Revenue (US$ m) 22,636.1 21,864.1 21,872.2 EBITDA (US$ m) 10,201.9 9,562.9 10,068.7 OCFPS (US$) P/OCF (x) EV/EBITDA (current) 8.8 9.2 8.4 Net debt (12/06A, US$ m) -9434.1 -11198.3 -14235.4 ROIC Number of shares (m) 2,171.00 IC (current, US$ m) 35,955.73 BV/share (current, US$) 8.01 EV/IC (x) 2.5 Net debt (current, US$ m) -9,434.1 Dividend (current, US$) 1.52 Net debt/Total cap. (12/06A) 3.0% Dividend yield 3.3% Source: Company data, Credit Suisse estimates Rating NEUTRAL*
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