The Wall Street Journal - 31.07.2019

THE WALL STREET JOURNAL. ** Wednesday, July 31, 2019 |B13

markets.

Right now, the economy still

needs more help. Producer price

inflation is flirting with zero, small

banks are struggling, and the labor

market is in trouble. But there are

also very strong voices within the

government calling for a hard line

on debt control.

After relying heavily on its one-

year medium-term lending facil-

ity—currently pegged at 3.3%—to

fund banks in recent years, the

central bank has unveiled a new

tool.

This is dubbed the targeted me-

dium-term lending facility, and has

a one-year rate of 3.15%. In theory,

only banks that “provide strong

support to the real economy” can

use the facility, which is meant to

boost small- and private-sector

lending, but the central bank has

discretion.

These loans can be rolled over

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

Natural Gas Stuck in Vicious Cycle

Priceshavefallenmorethan25%thisyearandmayremainweakforseveralyearsdespitestrongdemand.

Growing

Costs Are

Catching Up

With Apple

Higher expenses take a

bigger bite out of profit

The good times at Merck &Co.

keep rolling on.

Shares rose after the drug giant

and Dow Jones Industrial Average

component unveiled its second-

quarter results Tuesday morning.

Sales of $11.8 billion and adjusted

earnings of $1.30 a share were

well ahead of analyst estimates.

Merck also raised its full-year

sales and profit forecasts. The

company now expects sales to

grow at least 7% this year, despite

some pressure from foreign-ex-

change rates. That figure is partic-

ularly impressive considering the

fact that many large drugmakers

aren’t growing their top lines at

all.

Cancer drugs led the way. Sales

of blockbuster Keytruda were $2.6

billion in the quarter, up nearly

60% from a year earlier. That

growth seems durable since

Keytruda has now been approved

in 20 indications on the U.S. mar-

ket, including lucrative categories

such as lung cancer.

Analysts expect Keytruda sales

to grow through 2023, according

to FactSet.

Since the start of 2018, Merck’s

normally grounded shares have

outperformed the Dow by about 35

percentage points. The stock isn’t

particularly expensive either: It

fetches about 16 times forward

earnings, in line with the market

Nevertheless, Merck will likely

need new hits for that outperfor-

mance to continue.

Analysts expect Keytruda sales

to contribute about one-quarter of

Merck’s top line this year, up from

about 10% in 2017.

Meanwhile, sales of diabetes

drugs Januvia and Janumet,

Merck’s second-best-selling fran-

chise, actually fell 6% from a year

earlier.

Earnings multiples tend to con-

tract in the drugs business if too

much revenue comes from a single

product since patents on medi-

cines eventually expire and com-

petitors may eventually develop a

better drug.

Merck is well positioned to di-

versify.

Sales of the cervical-cancer vac-

cine Gardasil rose 46% from a year

earlier to $886 million. Experi-

mental drugs in Merck’s pipeline

to treat cancer and HIV could have

blockbuster potential.

Finally, the company’s strong

balance sheet and recently buoy-

ant shares means it can comfort-

ably make a splashy acquisition

should it see the need to bolster

its pipeline via the checkbook.

For now, Keytruda’s strength is

a high-class problem for Merck.

—Charley Grant

Stockandindexperformance

Source: FactSet

60

–20

0

20

40

%

2018 ’19

Merck&Co.

Dowindustrials

S&P500

The Federal Reserve looks al-

most certain to cut U.S. interest

rates on Wednesday. The People’s

Bank of China doesn’t need to fol-

low suit to make its own stance

looser.

Chinese monetary policy can

seem bewildering. The central

bank’s huge tool kit spans numer-

ous short- and medium-term lend-

ing rates, plus other tools such as

banks’ reserve requirements.

On top of that, political pres-

sureoftenforcesittopursue

seemingly contradictory goals—

such as simultaneously controlling

leverage and reducing corporate

borrowing costs.

The two issues are intertwined.

In fact, the array of instruments

probably provides some political

cover for the bank to act without

antagonizing different bureau-

cratic factions or setting off un-

wanted, frenzied speculation in

twice to last three years, meaning

that they are both cheaper and

longer-lasting than their predeces-

sors.

Replacing some maturing me-

dium-term loans with funds under

the new facility helps lower lon-

ger-term borrowing costs without

making big headlines, or flooding

money markets with liquidity, like

cuts to reserve ratios typically do.

This is exactly what the central

bank has been doing, most re-

cently on July 23.

News coverage on Wednesday

will probably focus on whether

Beijing’s central bankers will cut

their benchmark one-year lending

rate—a possible, but unlikely,

move.

The real action is taking place

in another compartment of China’s

cavernous monetary-policy tool

kit.

—Nathaniel Taplin

It is getting harder for U.S. nat-

ural-gas producers to see the glass

as half full.

The price of the commodity has

fallen by more than one-quarter so

far this year, losing 7% in the past

10 days and ending Tuesday at

$2.14 per million British thermal

units. The recent weakness comes

despite July’s heat wave in the

eastern U.S. generating record con-

sumption at power plants.

The persistent weakness and

concerns that prices could slip be-

low $2 by the time the heating

season kicks off in a few months

seem surprising given all the new

sources of demand for the rela-

tively clean-burning fuel. In 2018,

global natural-gas consumption

grew by an estimated 4.6%, ac-

cording to the International En-

ergy Agency.

U.S. drillers are playing a role in

meeting that demand. Exports

were minimal before 2016. Since

then, the U.S. has become the

world’s third-largest exporter of

liquefied natural gas, behind Aus-

tralia and Qatar. On Monday, the

U.S. Energy Information Adminis-

tration released data showing that

U.S. exports reached a new peak of

4.7 billion cubic feet a day in May

2019. There also are growing pipe-
      line exports to Mexico.
      Then there are industrial users
      such as petrochemical and fertil-
      izer makers. Once on the verge of

extinction due to price differen-

tials, they have boomed with the

shale revolution. Industrial use

rose by 24% between 2008 and

2018. Power generation demand
      has been the biggest driver, grow-
      ing by nearly 60% over the same
      period as coal plants have been
      displaced due to cost and environ-
      mental considerations. Overall U.S.
      natural-gas demand, which
      reached nearly 30 trillion cubic
      feet in 2018, up from 22 trillion in
      2005 when prices peaked at about
      seven times today’s level, is ex-
      pectedtogrowby7%ayearin
      2019 and 2020 according to EIA
      projections.
      The problem for producers is
      supply, not demand, and it is only
      going to worsen in the short run.
      Producers in West Texas, drilling
      primarily for oil, are getting natu-
      ral gas as a byproduct in their
      drilling process. The resource is

cheaper than free; bringing it to

market costs more than the mar-

ket price. This spring, the price of

natural gas at a trading hub near

Midland, Texas, dropped as low as

negative $9 a million British ther-

mal units.

The pricing reflects an infra-

structure bottleneck, but now the

equation is changing to the detri-

ment of prices farther afield. For

example, a Kinder Morgan pipe-

line with 2 billion cubic feet a day

of capacity is scheduled to enter

service this fall and the company

has another pipeline scheduled for

next year. Given the surfeit of such

“associated gas,” the EIA doesn’t

see prices rising consistently

above $4 per million British ther-

mal units before 2035.

Despite its usefulness, domestic

natural gas is likely to remain

cheap as long as oil production

booms. —Lauren Silva Laughlin

Apple Inc.’s latest results show

the popular gadget maker can still

sell a lot of expensive stuff in a

slump. Staying in the game carries

a growing cost, though.

For the fiscal third quarter re-

ported Tuesday afternoon, Apple

said revenue rose 1% year over year

to $53.8 billion. That came in

slightly ahead of Wall Street’s fore-

casts thanks to strong growth in

services as well as Mac, iPad and

Apple Watch sales. Those were

largely offset by a 12% decline in

revenue from the iPhone, which

still accounts about half of the

company’s business. Apple’s fore-

cast for the fiscal fourth quarter

confirmed another period of reve-

nue declines ahead. That was still

about 3% above analysts’ projec-

tions, though.

Operating expenses rose 11%

year over year in the third quarter

largely due to a record outlay of

$4.3 billion for research and devel-

opment. Technology companies

naturally have to invest in develop-

ing future goods and services, even

when their sales slow, but Apple’s

expenditures stand out due to their

historically small size relative to

the company’s resources. R&D ex-

penditures have averaged less than

5% of Apple’s annual revenue over

the past five years. Big Tech peers

Google, Microsoft and Ama-

zon.com have averaged between

12% and 16% over that period.

The recent increase still leaves

Apple highly profitable relative to

other consumer-electronics makers,

but its bottom line is feeling the

weight of the future. Apple’s need

to continue diversifying away from

the huge but mature iPhone busi-

ness has led to big investments in

new areas such as cars, augmented

reality and even moviemaking. Op-

erating margins of 21.5% in the

third quarter were the company’s

lowest in more than a decade, ac-

cording to data from S&P Capital

IQ. Operating margins for the full

fiscal year are poised to drop below

25% for the first time since 2008.

Being Apple has its price.

—Dan Gallagher

Merck Has Resources to

Find a New Blockbuster

How China Cuts Rates Without Cutting Rates

Recent price malaise

comes despite July’s heat

wave in the eastern U.S.

fueling consumption.

The problem is supply, not demand, as producers in West Texas, drilling primarily for oil, are getting abundant natural gas as a byproduct.

SPENCER PLATT/GETTY IMAGES

No animals were harmed in the

making of this fortune.

Beyond Meat Chief Executive

Ethan Brown knows a big, juicy

opportunity when he sees one and

also how to frame it for public

consumption.

The company announced on

Monday that it would sell 3.25

million shares. Some news reports

focused on how quickly the com-

pany was growing and the fact

that it needs to fund its expan-

sion.

But the offering is mostly an

opportunity for Mr. Brown and

venture capitalists at Kleiner Per-

kins and Obvious Ventures to un-

load a chunk of the red-hot stock

after it had soared by nearly 800%

from its initial public offering

earlier this year.

Only 250,000 shares, worth

about $50 million at current

prices, will bring fresh cash into

the still unprofitable company.

The shares sold off more

than 12% Tuesday following

the announcement but still

valued Beyond Meat at more

than food giant Campbell

Soup Co., which has about

100 times its revenue.

Mr. Brown and his backers

may remain confident in blis-

tering growth, but only a meat-

head would fail to take some

money off the table now.

RICHARD DREW/ASSOCIATED PRESS

OVERHEARD