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Canaccord Genuity on Procter & Gamble, Merck, and SAP


Commentary on P&G's new investor, Merck's new drug, and SAP's strength.

The following are excerpts from Canaccord Genuity analysts' commentaries.

Procter & Gamble (PG): Bill's excellent adventure.
Bill Ackman's Pershing Square hedge fund has been given clearance by the Federal Trade Commission to make an investment in Procter & Gamble, which is clearance that is required before making a large investment in a company. P&G has lagged its peers over the past two years, rising by roughly 4% while Colgate-Palmolive (CL) is up 28% and Unilever (UN) is up 18%. Additionally, the company said late last month that sales and profit are going to be lower than originally expected as it struggles to manage pricing and combat higher commodity costs. Sources close to the company note that morale is low internally and investors are becoming increasingly frustrated by P&G's struggles versus its peers. Ackman has a history of taking large positions in companies, then aggressively pushing for changes that he believes will add value for investors. Earlier this year, he won control of CP Rail (CP), forcing a change in the CEO position. He also took a large stake in JC Penney (JCP), helping engineer the move that brought former Apple (AAPL) executive Ron Johnson in as CEO of the company.

Merck & Company (MRK): A bright light in Merck-y markets.
Shares of Merck got a lift on Thursday after the company announced that its Odanacatib (osteoporosis) outcomes trial has been closed early due to robust efficacy and a favorable benefit-risk profile. Credit Suisse believes that Odanacatib's clinical profile and the potential of the market were materially underappreciated, with consensus estimates having material room for growth versus their base case (consensus peak sales of ~$700-800 million versus Credit Suisse peak sales of $1.1 billion). In light of this development, the brokerage anticipates Street estimates to increase providing further momentum to Merck stock. They believe longer term data from the planned extension study should allow for the efficacy benefit to grow and clarity on the side effect issues. Considering the significant market need and aging population, Credit Suisse believes an upside scenario (more likely now) could add ~$2 billion to their base case peak estimate. The brokerage also notes the press release alludes to monitoring of certain "safety issues" (details unknown) in the extension trial although they are not overly concerned. The robust efficacy/favorable benefit-risk profile and planned extension trial help provide context for the side effects. Also, they note that Merck is generally considered one of the more conservative firms when it comes to monitoring and communicating side effects.

SAP (SAP): Flower in a field of weeds.
German enterprise software maker SAP AG has bucked the tough conditions in the software sector by posting operating profit and sales figures that beat analysts' cautious expectations, as some competitors struggle amid a weak economic climate. Weaker guidance from the likes of Infosys, Infineon Technologies (IFX.F), the chipmaker, and Informatica (INFA), a data integration company, has shaken investor confidence in recent weeks. But Walldorf, Germany-based SAP reported Thursday total revenue for the quarter was 3.9 billion euro ($4.75 billion), up 18% from 3.3 billion euro ($4.00 billion) a year ago, and ahead of the Street consensus at 3.79 billion euro ($4.6 billion), while sales of new software licenses increased 19% to 1.06 billion euro ($1.3 billion). The company had projected 15-20% growth and analysts had predicted 977 million euro in sales. Revenue was boosted by new products including the rapid database software Hana, applications for mobile devices, and programs that can be accessed via the Web. Co-Chief Executive Officers Bill McDermott and Jim Hagemann Snabe stepped up the pace of acquisitions in the quarter, adding Ariba (ARBA) for $4.3 billion to bolster SAP's position in Web-based software and supply-chain applications and get ahead of archrival Oracle (ORCL), which had posted stronger-than-expected quarterly profit last month.

Editor's note: For more information on Canaccord Genuity, click here.
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No positions in stocks mentioned.
Canaccord Financial and its affiliated companies may have a Corporate Finance or other relationship with the companies mentioned and may trade in any of the Designated  Investments mentioned herein either for their own account or the accounts of their customers, in good faith and in the normal course of market making. The authors have not received, and will not receive, compensation that is directly based upon or linked to one or more specific Corporate Finance activities, or to coverage herein.
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