Merck Plans More Layoffs and Cost-Cutting to Bolster Stagnant Earnings

Merck & Co., Inc. (MRK$48.74) announced plans today to fire 8500 employees, in addition to the previously announced workforce cuts of 7500, totalling 20% of Merck’s entire workforce.  The company will take a near-term restructuring charge of up to $1.1 billion.

The company is struggling with government delays in new medicine approvals, and lack of revenue growth due to generic competition.  As a result, Merck plans to revamp its research and development to focus on core therapeutic areas, including its strongest area, diabetes, and also vaccines, cancer, and hospital care.  Merck will likely need to spend aggressively to acquire companies that can enhance its drug pipeline.

New CEO Ken Frazier is aiming for $1 billion in cost cuts in 2014, and $2.5 billion in savings in 2015.  Company headquarters will be moved to Kenilworth, NJ.

Wall Street expects Merck’s earnings per share to fall 9% this year, then climb 3-5% per year for the next two years.   2014 revenues are expected to be flat. The dividend yield is 3.5% and the PE is 14.  Morgan Stanley expects earnings to remain flat from 2014 through 2018.

Merck’s stock is on a very slow multi-year uptrend.  It’s been trading sideways since early April.  The trading range is narrowing, and the stock could conceivably break through upside resistance at $49.50 and travel to $54 in the near future. 

Not only is there no compelling reason to buy Merck shares, but we would consider selling once it approaches $54, and move on to a stock with stronger earnings growth.

Goodfellow LLC rating:  Hold, Public.  (10-01-13)

 

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Happy investing!

Crista Huff

President

Goodfellow LLC

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