Monday, November 1, 2010

Conflicted Citi Analysts Have "Millions" Of Reasons To Reiterate "Buy" On Merck

Regular readers will recall that Citi has deep and lucrative relationships with Merck & Co (through legacy Schering-Plough fee earnings).

They will also recall that last summer, Citi helped lead the underwriting of Merck's $4.25 billion offering of senior unsecured notes -- the proceeds of which helped finance the Schering-Plough bust-up transaction (along with Credit Suisse, and others).

Thus it is no surprise that -- while Goldman, Sachs & Co. (a name entirely missing from the Summer 2009 Merck $4.25 billion transaction-fee table) is still calling for covered puts at $35 on Merck -- with a 2011 expiry, Citi is reiterating its "buy" recommendation, this morning (per the Benzinga online alert service):

. . . .The Citi analysts said MRK's stock is likely to remain range-bound for the remainder of 2010, as the overhang from the Johnson & Johnson arbitration is not expected to be resolved until early 2011. . . .

As for valuation, the analysts remarked, "We decreased our 2010 vaccine sales to $3.5B (-$60M); infectious diseases to $4.1B (-$100M), and removed Subutex from our estimates. These declines were partially offset by more robust sales of Singulair (+$100M). We decreased gross margin by 40bp to 75.5% to account for the 3Q10 miss. We lowered R&D as percentage of sales by 10bp to 18.0% and maintained S,G & A at 27.4%. Our 22% tax rate is unchanged, but lowered share count by 9M. . . .

I have several observations -- but the biggest miscalculations above are likely to be at the tax-rate line (especially in view of Puerto Rico Law 154), and Merck's buyback program is not presently active, so the 9 million share reduction looks dubious in 2010 -- with only about 40 NYSE trading days left in the year. This all reads as a little too strained.

It is important to note that Goldman did advise Schering-Plough in the mega-merger, and earned huge fees there (but also had access to lots of Schering inside information). Who's opinion to trust? I dunno. We shall eventually see who's quick; and who's dead.

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