Shares of Dow component Merck are trading lower in the very early going this morningafter the country's second-biggest drug company didn't blow people away with its 2008 financial guidance.
Merck puts out its new forecast a week ahead of its annual analyst meeting, so it can focus more on its drug development pipeline at the event.
Merck says earnings per share this year will come in at least a penny below the current consensus of analysts. And for next year, it put out a range that allows it to post EPS anywhere from eight cents below to two cents above the Street. But Deutsche Bank's Barbara Ryan told us on "Squawk Box" this morning that investors should remember that MRK's current '07 EPS forecast is 28 percent higher than its original outlook this time last year.
In other words, the company underpromises and overdelivers. In fact, every quarter this year it has raised earnings guidance. Last week Ryan boosted her 12-month price target on MRK from $62 to $70. Deutsche makes a market in MRK and owns at least one percent of the shares.
Investors may also be using the new guidance as an excuse to cash in (I don't like the term "profit taking"). The stock hit a multi-year high of more than $60 last week. On the conference call Merck said that next year it will return to pre-generic Zocor gross margins. That's a year earlier than the company had forecast.
It's getting there on continued cost cuts and fast-growing sales of newer products. For example, the company says revenue from its asthma/allergy drug Singulair could push toward $5 billion in 2008 and that its vaccine business could do more than $5 billion next year. And the company plans to file for FDA approval of two new drugs next year--a weightloss pill and a treatment for atherosclerosis. But it will also take a big hit when its blockbuster osteoporosis drug Fosmax goes generic in '08.
Goldman Sachs analyst James Kelly is telling clients to stay on the sidelines. In a research note he writes, "…guidance looks good but not great." GS makes a market in MRK and has done and wants to do more investment banking for the company.