Can Merck Keep Growing?

 
on March 14 2013 10:53 AM

With shares of Merck (NYSE:MRK) trading around $44, is MRK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for a Stock’s Movement

Merck provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products worldwide. With an increasing amount of people living longer, healthcare is becoming a main concern for many. Merck is a giant in this industry so they are well-positioned to capitalize on this movement. Look for Merck to continue its dominance as a provider of healthcare solutions worldwide.

T = Technicals on the Stock Chart are Mixed

Merck is a stock that has been whipsawing around over the last decade. The stock has seen periods of euphoric rises that are often followed by periods of steep declines. Since the fierce stock market decline in 2008, Merck stock has risen on higher highs and higher lows, like most stocks. This uptrend should remain in tact until the stock hits a zone of significant selling pressure, more than likely near the $60 price area.

Moving averages can help determine a trend, if there is one. Key simple moving averages can provide insight into the trend and strength of the trend. What are the key moving averages? The 50-day, 100-day, and 200-day simple moving averages. Merck is trading above its untangling key moving averages. What does this mean? The stock is getting ready to move higher but may still need a little bit of time.

A relatively simple way to gain perspective into investor sentiment is through the use of the options market. More specifically, taking a look at the implied volatility and implied volatility skew levels of Merck options may help determine if investors are bullish, neutral, or bearish. The implied volatility of Merck options is at 15.11 percent today which coincides with a 3rd percentile over the last 30 trading days and 11th percentile over the last 90 trading days. What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

The implied volatility skew of April and May put and call options is at about average. So as of today, there is an average demand from call and put buyers or average supply of call and put sellers, all neutral over the next two months. Investors are buying a minimal amount of call and put option contracts and are leaning neutral over the next two months.

E = Earnings Are Mixed Quarter-Over-Quarter

Earnings and revenue growth rates should be rising so that a stock price can rise. After all, most equity valuation models incorporate earnings and revenue growth rates into the value of an equity. What do the last four quarterly earnings and revenue growth figures for Merck look like? The last four quarterly earnings growth (Y-O-Y) rates have been: -37.5, 1.82, -10.77, and 64.71 percent while the last four revenue growth (Y-O-Y) rates have all been: -4.53, -4.44, 1.32, and 1.3 percent. Merck has displayed declining earnings and revenue growth rates.

What did the street think about these numbers? The last four quarterly earnings announcement reactions help gauge investor sentiment on Merck’s stock. The last four quarters have seen next trading session returns of -3.28, -0.32, 4.07, and -0.02 percent. The street has not been too happy with Merck’s earnings reports.

E = Excellent Relative Performance Versus Peers and Sector

How has Merck stock done relative to its peers and sector? Year-to-date, the stock is returning 7.87 percent while its competitors, GlaxoSmithKline (NYSE:GSK), Novartis (NYSE:NVS), Pfizer (NYSE:PFE), and sector are returning 1.12, 7.46, 8.14, and 10.59 percent respectively. Merck has been one of the relative performance leaders of its sector.

Conclusion

Merck engages in a healthcare field that is seeing drastic changes in the coming years. Due to the increasing life expectancy of people worldwide, the company is in an area that can see significant profits. On the price chart, the stock hasn’t performed too well but it looks to be getting ready to move higher. However, this move many not be supported by the disappointing earnings and revenue growth rates. Lastly, relative to its peers and sector, the stock has been a performance leader. So, WAIT AND SEE what Merck does in the coming quarter.

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