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Berkshire Hathaway Inc. Message Board

  • rocketscienc rocketscienc Sep 30, 2004 8:44 AM Flag

    SILVER

    www.kitco.com/market/

    5 buck silver gone forever. So will 6,7,8,9,10...

    Fundamentals are STRONG. And so will the price be.

    Patience.

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    • "we should see crossover soon as the company shrinks"

      Yes, we should.

      "So MRK at 33.50 is a reasonably secure 4.5% yield plus a long-term call option on their pipeline. Agree?"

      Sounds reasonable.

      "You get paid 4.5% while you wait, but that's all you get. And 2012 is a long wait"

      Also reasonable.

      What might make the dividend more secure than it otherwise should be, at 16% of revenues, given a questionable future revenue stream, is that cash and securities about equals debt. So they can borrow to some degree to maintain the dividend, if there is faith in the long term pipeline.

      BTW, one might find that many pharm companies have cash/securities about equal to debt because they tend to have a lot of cash stashed overseas. If they bring the funds back, they have to pay US taxes on it. So, instead of bringing it back and paying tax, they borrow here to pay dividends to US shareholders and let the overseas stash build. A minor positive for Merck could be if the US changes the tax law, giving a low tax rate and a small window to encourage repatriation of overseas funds (which could total $300 billion or so for techs, pharms, et all, in total), providing some additional liquidity. Also, if the tax law is not changed, I'm curious if the overseas stashes might not make some US companies more attractive to a foreign buyer. These points might not make that much difference to Merck, but more so to companies such as BMY, which are weaker and where the foreign cash/debt situation is more extreme.

      An additional couple of points as to liquidity, given the importance of the dividend. Merck has long term investments on the balance sheet of about $7 billion. Much of this is probably offset by the large amount of minority interest on the balance sheet, but in some their literature they seem to imply that much of the $7 billion is actually liquid (stashed overseas?). Also as relates as to liquidity is an ongoing disagreement with the IRS over taxes paid for the last ten years. The IRS has already ruled, earlier this year, that Merck owes about $1.5 billion for the first 5 years of this period and Merck says they could also make claims for the latter 5 years. Merck says they have reserved for, but not paid, the $1.5 billion, because they have appealed. Merck has nearly $3 billion of income taxes payable as a current liability on the balance sheet, which is a lot, given they only pay about that much in a whole year. They�d have to make no quarterly payments for the amount to be that large. One might assume the reserve is in there.

      Lastly, BMY is an example of another pharm that also a large overseas stash, a similar cash/securities and debt situation, little hope of increasing earnings the next few years, and a high dividend payout ratio. They have a payout ratio of 75% have been able to maintain it, at least up until now, partly because they�ve been borrowing against the overseas stash. Although BMY recently lost its AAA rating, they still have a AA rating, though the debt ratio, not including the overseas stash, might not indicate they should have such a high rating.

    • "(a) I didn't say I was investing in MRK - I would never have thought to become a bagholder in MRK; it was a speculative trade after the wreck was complete, for the moment;"

      The point is not whether the person commiting the funds considers the move an investment or a speculation -- the issue is capital at risk.

      "(b) I didn't say I thought MRK was going to zero, that's your mischaracterization;

      Well, you certainly implied it.

      "(c) 200 basis points on a one day trade is a 720% return on investment annualized, and exponentionally higher on call options; and"

      Give me a break -- extrapolating something like that makes no sense.


      "(d) to protect my capital, even for a trade taking place after the big selloff, I used options to obtain 78% of my exposure to MRK; "

      Now, I'm REALLY confused ... how are call options safer than buying the underlying stock? Presumably, it would be far easier to lose all your capital in this manner.

      "...please do yourself a favor and don't try this at home. "

      I wouldn't think of it.

    • < "Thankfully the dead cat MRK bounced 200 basis points this a.m. and i was able to unload all of the options and stock i loaded the prior morning. Now for all I care MRK may go to zero, because I will never invest in this value-destroyer."

      I'm going to ask a question, and I'm not being sarcastic. Why in the world would you risk your capital on speculation over a dead cat bounce if you truly believe that MRK is a value destroyer and could go to zero? It appears idiotic to me that anyone would put his capital into a business in pursuit of a 2 pecent gain if you believe that there is a possibility of 100% loss. Just insane.

      FWIW, I didn't buy MRK after the crash but I also don't beleive that it is going to zero. >

      Sorry it appears "idiotic" to you - your political opinions have a similar appearance to me, but I don't stoop to personal attacks just because I disagree with someone.

      And since you don't appear to read carefully or understand the implications of what you read, let me explain that:

      (a) I didn't say I was investing in MRK - I would never have thought to become a bagholder in MRK; it was a speculative trade after the wreck was complete, for the moment;

      (b) I didn't say I thought MRK was going to zero, that's your mischaracterization;

      (c) 200 basis points on a one day trade is a 720% return on investment annualized, and exponentionally higher on call options; and

      (d) to protect my capital, even for a trade taking place after the big selloff, I used options to obtain 78% of my exposure to MRK;

      I was fairly comfortable with the risk/reward for that trade. If that appears "idiotic" and "insane" to you, please do yourself a favor and don't try this at home.

    • "Thankfully the dead cat MRK bounced 200 basis points this a.m. and i was able to unload all of the options and stock i loaded the prior morning. Now for all I care MRK may go to zero, because I will never invest in this value-destroyer."

      I'm going to ask a question, and I'm not being sarcastic. Why in the world would you risk your capital on speculation over a dead cat bounce if you truly believe that MRK is a value destroyer and could go to zero? It appears idiotic to me that anyone would put his capital into a business in pursuit of a 2 pecent gain if you believe that there is a possibility of 100% loss. Just insane.

      FWIW, I didn't buy MRK after the crash but I also don't beleive that it is going to zero.

    • <What is the present value of something that is projected to have shrinking earnings as far as one reasonably can project? >

      $240 billion


      http://finance.yahoo.com/q/ks?s=MSFT

      :o)

    • Thankfully the dead cat MRK bounced 200 basis points this a.m. and i was able to unload all of the options and stock i loaded the prior morning. Now for all I care MRK may go to zero, because I will never invest in this value-destroyer. Some have opined that MRK's future may amount to not much more than an AH Robbins-like trust whose purpose is to defend and pay out on Vioxx user [and shareholder] lawsuits. Perhaps. But in any event, given the projected decline in earnings for several years [and that's probably optimistic, as analysts tend to be] IMO MRK is a wasting asset. What is the present value of something that is projected to have shrinking earnings as far as one reasonably can project?

    • <<over the long run, Merck's net income will about equal its free cash flow, meaning cap ex will about equal depreciation.>>

      Over the long run this should be true for any company. Of course, as the famous saying goes, over the long run we're all dead. Getting back to MRK, capex has exceeded depreciation every year since 1989. No problem, until lately they were growing. The gap has narrowed recently; we should see crossover soon as the company shrinks. If not it indicates a problem.

      <<They owned Medco during this period, so I'm not sure how much that affected the numbers you indicate>>

      The 7 year numbers from the '03 10-K exclude Medco (mostly). One weakness of my analysis is some of the reinvested profits during those seven years went into Medco and was thus returned to shareholders in the Medco spinoff. I doubt we're talking about more than a billion or two, but without digging I can't be sure.

      <<This is a cyclical business.>>

      True, and one must be careful to avoid peak-to-trough comparisons (or Wall Street's favorite: trough-to-peak). 2007 is hopefully a trough. 1997 was neither peak nor trough. A 1987-2007 analysis would look better, with 6% or so compounded earnings growth.

      <<MRK has actually had three cycles, product dry spells, since the 50s wherein they showed little progress for 5- 10 years.>>

      It entered the fourth dry spell in 2002. Growth should thus resume sometime between 2007 and 2012. You get paid 4.5% while you wait, but that's all you get. And 2012 is a long wait.

      <<what is meaningful, and stunning, is that 16% of revenues currently go to pay dividends.>>

      Wow, great point. If they return to average margins of 15-18% then the payout ratio will be 100%. At least this solves the reinvestment problem! But it reinforces the idea that the dividend is pretty much all you're going to get for a while. No spare cash for buybacks or reinvestment.

      <<As for ROIC, this is not as meaningful a measure for a pharm company..>>

      Another good point. Pharma growth isn't really dependent on having free cash flow to reinvest. Should MRK's pipeline unexpectedly produce a few killer drugs they'd have no problem getting the cash to ramp sales. The pipeline is what matters.

      So MRK at 33.50 is a reasonably secure 4.5% yield plus a long-term call option on their pipeline. Agree?

    • greetings lancer4447...
      YOUR COMMENT:"I'm taking my boat for a two week trip next week up the atlantic coast to the tip of Cape Cod. Wish me luck. The tuna are biting!" MY RESPONSE: "Load da Boat"
      best to you, bdparts

    • "I thought it was a general purpose arthritis drug?"

      That also, which probably accounted for most of the sales. There was a NY Times article on this topic yesterday. However, apparently not that many people actually used for longer than 18 months. The reason they withdrew it is because they were concerned about the longer-term users.

      I personally know of a few people that used it both for very short periods, some for special situations and others for general purpose. Of those that used it for general purpose, about 1/2 or so might have quit for some reason or another. My mother, for example, quit, and started using Celebrex because Vioxx caused her some discomfort in her legs. However, Celebrex may be no better than Aleve for many people.

      This is from the NY Times:

      <<Not everyone who takes Vioxx does so for 18 months or longer. Or even daily. Some arthritis patients take it only during flare-ups. And other people might take it only for several months, after a sports injury, for example. Medical experts say that it is safe for patients to abruptly stop taking Vioxx, adding that there are many alternatives to the drug, including cheap over-the-counter drugs. One of those, aspirin, is much cheaper than Vioxx, which has sold for $2.50 or more a pill. Vioxx provides about the same pain relief as aspirin, although studies showed that patients taking it were less likely to develop ulcers or gastrointestinal bleeding.>>

    • Neb,

      I think anyone interested in Merck should at least give some attention to SGP. While not exactly the same situation as Merck, it would certainly rhyme.

      Looking at Valueline up until 2002 when Claritin went off patent, it is a beautiful picture of steadily rising earnings and cash flow.

      A few major points:

      Even though Zetia was in the pipeline, it was a considerable time before it was approved, first in Europe and, finally, in the U.S. Even after approval, there is a long rampup period and an even longer period before any real take off in sales can occur. It hasn't really become a blockbuster yet.

      The combination of Zetia with Zocor has been the subject of much hope but even with approval and updated recommendations of ever lower cholesterol targets, it is going to be a time consuming process.

      Both Zetia and Vytorin sales and profits must be shared with Merck.

      I am tempted to buy Merck but I will tell you that I think the turnaround will be much longer than almost anybody foresees right now.

      Just thoughts,
      Mike

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