Goldman Downgrades Merck

It says the company's earnings guidance is inflated.
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Goldman Sachs said shares of

Merck

(MRK) - Get Report

are likely to struggle because the drugmaker's earnings and revenue forecasts are unrealistic.

The brokerage downgraded the stock to underperform from in-line and predicted annual earnings will fall each year through 2008. Specifically, Goldman expects Merck to earn $2.28 a share in 2006; $2.03 a share in 2007; $1.84 a share in 2008; $2.27 a share in 2009; and $2.49 a share in 2010.

"Earnings could exceed our view on stronger sales of new launches (e.g., Gardasil HPV vaccine or sitagliptin for diabetes) or cost containment could exceed our forecasts (which are in line with guidance). Lastly, the dividend's attractiveness could support valuations to $38/share (4% yield), but we believe the overhang from Vioxx litigation and our view on the earnings trajectory makes this unlikely."

According to Thomson First Call, Wall Street analysts in the aggregate expect Merck to earn $2.51 a share in 2005; $2.33 a share in 2006; and $2.31 a share in 2007.

Merck fell 44 cents, or 1.3%, to $32.69 early Thursday.

Goldman also said it expects Merck to record little or no growth in its annual adjusted revenue over the next four years. The consensus Thomson First Call sales estimates are $21.9 billion in 2005; $20.7 billion in 2006; and $20.6 billion in 2007.

Goldman noted that Merck's own guidance calls for double-digit adjusted earnings growth and 4% to 6% adjusted revenue growth over the next several years.

"We view management's long-term guidance of double-digit EPS growth through 2010 as laudable for company morale and motivation, but difficult to achieve from an investor's perspective," Goldman said. "In our view, Merck's pipeline opportunity is not significant enough to reverse revenue declines from patent expiries until 2009."