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Why Merck Will Move the Dow Tomorrow

By Dan Caplinger – Feb 4, 2014 at 4:30PM

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Earnings season for the Dow is in the home stretch, and Merck will tell its side of the pharma story before the bell tomorrow morning. What it reveals could move the market Wednesday.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrials (^DJI 0.45%) managed to bounce back a bit today from its slide so far in 2014, with the average closing up 72 points. In large part, earnings have taken a backseat role to global macroeconomic considerations in the Dow's drop so far this year. But even though the blue-chip index's earnings season is winding down, Merck (MRK 0.64%) will give investors another look at the important pharmaceutical sector when it reports fourth-quarter earnings on Wednesday. A demonstrate of the drugmaker's ability to recover from its plunge over the patent cliff could give the Dow a shot in the arm to add to its gains from today.

Merck will announce its results before the bell tomorrow morning, with a conference call scheduled for 8 a.m. EST. The company typically issues a press release with earnings figures before the call, with investors expecting to see it around 7 a.m.

On its face, the Merck earnings report will center on the drugmaker's capacity to move beyond its patent-cliff issues and start finding new blockbuster products that can replace lost revenue from past superstars that have lost exclusivity. Even though revenue is expected to fall again from year-ago levels, Merck's efforts to rein in costs and streamline operations could help the company grow its profit for the quarter.

Yet the potentially larger question that Merck needs to face is whether it should make a dramatic transformation of its business structure to take advantage of changing conditions in the pharmaceutical industry. Rival Pfizer (PFE 0.74%), for instance, has completely spun off its animal-health segment, and that has helped the company focus more directly on finding new drug candidates to boost its long-term revenue prospects. The split between AbbVie and Abbott Labs is another example of the trend away from health care conglomerates toward more specialized businesses. Even Johnson & Johnson (JNJ 0.13%), which has resisted outright spinoffs of its huge business segments, is considering an offer from Carlyle Group to buy J&J's Ortho Clinical diagnostics division, allowing the health care giant to focus more on its money-making pharma business.

If Merck makes a more serious move toward breaking up its business into component parts, it wouldn't be the first Dow member to take steps to unlock shareholder value. But a trend toward more of those value-adding moves could restore confidence in Wall Street, and that in turn could help entice value investors back into the market at its lower levels. Keep an eye on how aggressive Merck is in trying to take steps forward, and if it surprises investors positively, Merck's gains could easily bleed into the market at large.

Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,347.03 (0.45%) $152.97
Merck & Co. Stock Quote
Merck & Co.
MRK
$107.50 (0.64%) $0.68
Pfizer Stock Quote
Pfizer
PFE
$49.21 (0.74%) $0.36
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$177.24 (0.13%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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