I looked in the rubble pile, and I found Merck. It isn’t often that a quality, large-cap issue winds up here. Merck got hit with what drug stock investors dread – product recall. The company had to withdraw its Vioxx painkiller from the market due to potential cardiac problems. Generating $2.5 billion in sales, Vioxx was a blockbuster drug. The stock is down nearly 40% since the announcement on September 30.
What do the company and stock look like now? I processed all the key data and information through the Company / Stock Risk Profile™ to get an objective assessment. Merck failed 16 out of 50 categories giving a “Low” Risk Profile Rating.
Merck remains a leading company in its industry. The balance sheet is solid. Cash from operations and free cash flow, although both are down some in this year’s nine months, continue to be strong. Profitability measures outpace the Industry and the S&P 500. The Company / Stock Risk Profile™ uses six methods to value stocks. Merck passed with flying colors, except for one. The stock failed the PEG ratio (P/E / Earnings Growth Rate) because Street analysts have slashed their long-term forecasts for earnings growth. Most analysts have abandoned Merck. Only 3 analysts are recommending purchase out of a total of 29 analysts covering the stock, according to Yahoo! Finance. The Company / Stock Risk Profile™ rates this an important positive factor. See “Know a Stock’s Street Sponsorship to Anticipate the Potential for Change” posted on the Articles page of this website.
The principle issue is litigation from Vioxx users who suffered cardiac events. While the impact on the company could be substantial, it is an unknown variable. I expect the uncertainty to hang over the stock for some time. However, the shares, yielding a hefty 5.5%, may appeal to a contrarian investor taking a long-term view and with the stomach for a potentially highly volatile stock as litigation proceeds.
