Monday morning brought a mixed opening to the stock market, as most broad-based indexes consolidated their gains after last week’s record run. As of 11:15 a.m. EDT, the Dow Jones Industrial Average (DJINDICES: ^DJI) was up 62 points to 27,255. However, the S&P 500 (SNPINDEX: ^GSPC) fell 7 points to 3,019, and the Nasdaq Composite (NASDAQINDEX: ^IXIC) gave up 63 points to 8,267.
Even in the middle of earnings season, merger and acquisition news can move markets, and Pfizer‘s (NYSE: PFE) offer to merge its generic drug business with Mylan (NASDAQ: MYL) is an interesting move in a tough industry environment in healthcare. Meanwhile, Chipotle Mexican Grill (NYSE: CMG) got a big upgrade from a top stock analysis company, and that has many investors hungry for the burrito maker’s shares.
Pfizer’s Mylan move
Shares of Pfizer fell more than 2% after the pharmaceutical giant announced that it would combine one of its units with Mylan. Upjohn, which is Pfizer’s generic and off-patent branded drug division, will merge into Mylan, with the deal involving a simultaneous combination between the two companies and spinoff from Pfizer into a separate publicly traded entity.
Three people in white coats looking at a Pfizer petri dish.
The companies’ justification for the move is generally to expand their global scale, especially in China and other emerging markets. Combining product lines, pipelines, and platforms should create $1 billion annual synergies. The combined Upjohn-Mylan will have sales of as much as $20 billion, with $7.5 billion to $8 billion in adjusted pre-tax operating earnings.
However, the combination will also give Pfizer a chance to adjust its capital structure. The new company will have about $24.5 billion in total debt after the deal closes, but it will have a goal both to reduce that debt level at an accelerated pace, as well as pay meaningful dividends to shareholders nearly immediately after closing.
Mylan investors seem to like the deal, with the stock climbing 9% in morning trading. For Pfizer, though, shareholders seem less certain about the move. Investors have called for Pfizer to take some sort of action to restructure its business for quite a while now, but whether this is exactly what they had in mind isn’t entirely clear — as is whether the combination will work as well as Pfizer and Mylan hope.
Chipotle spices up
Chipotle Mexican Grill saw its stock climb 3%, rising above the $800-per-share mark after the burrito maker got favorable comments from analysts at Goldman Sachs. Goldman started its coverage on Chipotle not just with a buy rating, but also with an entry on the Wall Street giant’s “conviction buy” list.
As Goldman sees it, Chipotle has made a complete recovery from its food-borne illness woes over the past several years, but investors haven’t given the restaurant chain full credit for the progress that it’s made over that period. The Wall Street company sees Chipotle as the best player in the restaurant industry, and that also supported setting a price target of $1,000 per share — more than 25% higher than where the stock started the day.
The arrival of CEO Brian Niccol marked a big shift in Chipotle’s performance, and the results have spoken for themselves. In its most recent quarterly report just last week, the burrito chain saw 13% revenue growth and significant margin expansion, helping adjusted earnings per share rise almost 40% year over year. Expansion, along with moves like adding digital ordering, has bolstered overall growth.
Some fear that Chipotle has already come too far, too fast. Goldman, though, seems convinced that the burrito giant has an even tastier future in store for shareholders.
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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool recommends Mylan. The Motley Fool has a disclosure policy.