Schering Plough: Why It's Down And Merck's Up
Here are my thoughts so far today:
1) As expected, sloppy trading--weak open, modest rally, sell into rally. The crowd yelling "oversold" cannot drown out the great majority, who feel it is not really worth it to be a hero until things settle down.
2) What's up with Schering Plough ? Down 14% as it missed earnings by two cents. Some complained that revenues of key products were a tad below expectations, but UBS disagrees, notes that sales for most key products and spending were otherwise largely as expected, gross margins were just a bit below expectations.
So why the big selloff? Schering had a very high valuation compared to the rest of the pharmaceutical stocks (about 22 times forward earnings; Merck , by contrast, about 17 times); even a small miss can make a difference when expectations get adjusted.
3) Keep an eye on key market metrics like stock buybacks, which have been a major help to the markets for the past two years. Trimtabs tells me that new stock buyback announcements, which were averaging about five a day, are now down to three a day. Watch other key data like payroll withholding, a sign of how much people are taking home each week.
4) A diverse group of companies are reminding us that raw material inflation is an issue. Look at chemical maker Rohm and Haas , which announced price hikes, saying raw materials like propylene, ethylene, and methanol "have remained persistently high," with no real relief expected in the future. Ethylene and propylene, for example, is widely used as a feedstock in the manufacture of plastics. They have a particularly large division that makes additives and binders for paints and coatings (25% of sales), so expect higher prices for paints as well.
Does this complaint about higher raw material prices sound familiar? Last week Union Pacific CEO Jim Young posted good numbers for his company, but said, "Near-term we remain cautious on the economy and see challenges from rapidly increasing diesel fuel prices." Domino's Pizza and Hershey's both complained that higher food costs were squeezing their margins.
5) AmEx reports after the bell, and seem like everyone is expecting charge offs for bad debt to increase, and charge volumes to slow. Lehman downgrading the credit cards (AmEx, Capital One, Discover), saying, "In past environments where non-performing assets were rising and consumer spending was slowing, card issuers' stocks typically underperformed the market."