Seamus Fernandez Steady On Merck — But With A Curiously-Low 12 Month NYSE Target Price

Back in February 2013, coming out of its annual healthcare investors’ conference, Leerink Swann (driven by the analysis of Seamus Fernadez) marked Merck as a “Market Perform“. Yesterday, Seamus reaffirmed, but moved the NYSE 12 month price target to only $48.45 — essentially flat with today’s trading. Odd.

Since February 2013, almost nothing has changed at Merck — of a material nature. As we enter the turn, on the thrid quarter of 2013, Merck continues to make bank, more by financial lever-pulling, than pure operational improvement. Even so, Whitehouse Station can continue to deliver, through about mid-2017, even if nothing gets better organically, within the operations of the businesses — and probably through late 2015, even if there is some material erosion in the businesses. That’s my assessment. Do your own diligence here.

In short, I’d say don’t bet against Merck in the near term — it is a great defensive play at the moment, with a lush dividend to clip. So do so, by all means.

However, Ed Silverman — whose opinion I greatly respect — made the case, in Forbes yesterday, that Merck needs another major restructuring. I am unconvinced, despite how much I like Ed.

. . . .Leerink Swann increased its EPS estimates on shares of Merck (MRK) through 2014 as lower R&D costs will help improve earnings over the next few quarters. In the report, Leerink Swann maintained its market perform rating and set a price target of $48.45. . . .

[And Ed’s take:]

Actually, Fernandez is being kind by describing top-line growth as lackluster. For the first six months of the year, Merck sales fell nearly 10 percent, to nearly $21.7 billion. Meanwhile, R&D spending was essentially flat at roughly $4 billion, which means R&D spending accounted for 18.5 percent of sales compared with 16.7 percent during the same period last year. And marketing and administrative expenses fell 3 percent, to $6.13 billion, but accounted for 28.3 percent of sales, up from 26.3 percent. . . .

Of course, both of them can be right — Merck could do just fine through 2017; and it might also benefit from a shakeup between now and then. My bet? Not on Chairman Kenneth Frazier’s watch. In any event, here is the lead-off item — on Seamus Fernadez’s price target.

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