For a little while now, I've openly questioned Merck's (NYSE: MRK) decision to go with an operations-oriented insider for the CEO post. Monday's announcement highlights why I wasn't too thrilled with the pick. Sure, cost-cutting and operational improvements will help reported earnings per share and cash flow generation, but in my view, they won't truly enhance the company's prospects.
Investors familiar with big corporate cost-cutting will see many familiar themes in Merck's announcement. The company is shooting for as much as $4 billion in cumulative savings by 2010. That's a figure it hopes to achieve by axing about 7,000 workers, closing and/or selling five plants (of the company's 31), and instituting more efficient manufacturing and order-handling operations.
The company also offered guidance for both 2005 and 2006 sales and earnings. Sales guidance looks to be getting a pretty sharp haircut, with '05 sales tagged at a range of $19 billion to $20.5 billion (current average estimate of $21 billion) and an '06 outlook of $17.6 billion to $19.1 billion (current average estimate of $21.4 billion). For those who follow Merck a little more closely, the details aren't a big surprise -- a big decline in Zocor sales for '06, along with a modest decline in Fosamax and a modest increase in Singulair.
Turning to earnings, the company is expecting earnings (adjusted for the restructuring program, tax repatriation, and other such items) between $2.47 and $2.51 for 2005 (versus the median of $2.50). For 2006, it sees adjusted earnings of $2.28 and $2.36 for 2006 (versus the median of $2.38).
So what's my beef with this decision? Well, let's just say that not too many companies are able to cost-cut their way into prosperity. Sure, belt-tightening is a sound and rational thing to do when times get tough. But sales growth is ultimately the fuel of better earnings, cash flow, and dividends.
Of course, the pharmaceutical industry isn't one in which you just snap your fingers and sell new products; development timelines are long and uncertain. What's more, licensing new compounds and/or acquiring other companies isn't a sure strategy either -- both can be expensive and there are no guarantees of success. In that context, I'll grant that cost-cutting is at least one endeavor where the company has some meaningful measure of control over the outcome.
My opinion on Merck hasn't changed much. Very patient long-term investors can look to these days as an opportunity to build positions (especially on down days), but I like stocks like Sanofi-Aventis (NYSE: SNY), Novartis (NYSE: NVS), and maybe Glaxo (NYSE: GSK) or even Pfizer (NYSE: PFE) better right now. Of course, all Fools need to do their own due diligence and make their own calls.
We've got your prescription for more Foolishness:
Merck and Glaxo are recommendations of
Motley Fool Income Investor. Pfizer is aMotley Fool Inside Valuerecommendation. Check out our suite of newsletters, find one that suits your style of investing, and take a free trial.
Fool contributor Stephen Simpson owns shares of Sanofi-Aventis. The Fool has a strict disclosure policy.
Terms & Conditions
RSS Headlines
Fool UK