Will Merck Make All Time Highs This Year?

With shares of Merck (NYSE:MRK) trading around $58, 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:

T = Trends for a Stock’s Movement

Merck is a global healthcare company that delivers health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products, which it markets directly and through its joint ventures. The company consists of four operating segments: the Pharmaceutical, Animal Health, Consumer Care, and Alliances segments, and one reportable segment in the Pharmaceutical segment. Merck aims to provide valuable healthcare products and services to consumers, animals, and companies in need worldwide. Look for the company to see rising profits as it advances the products and services of the healthcare field.

Merck research Chief Roger Perlmutter has stated that the company is more than open to the idea of buying big acquisitions of biotech companies rather than go forward and obtain drug development technologies. Mr. Perlmutter reiterated the company’s attitude for new deals at the back of the planned $3.85 billion acquisition of Idenix Pharmaceuticals (NASDAQ:IDIX). Merck has already announced its plans to buy Idenix and planning to combine the two company’s oral drugs for hepatitis C, with a view of producing a faster cure for the fatal liver infection that currently affects more than 170 million people worldwide. This is part of Merck’s efforts to be a pioneer in the development of Hepatitis C drugs. Mr. Roger also maintains that newer drugs are hoped at tripling therapy using Idenix’s IDX21437 sure to make Merck a top competitor in the Hepatitis C spectrum. Merck’s $3.85 billion acquisition of Idenix essentially gives it additional experimental medicines. Idenix Pharmaceuticals is reported to be developing a medicine class called ‘nucs,’ a valuable part in new treatment regimens.

T = Technicals on the Stock Chart Are Strong

Merck stock has been surging higher in the last couple of quarters. The stock is currently trading near highs for the year and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Merck is trading above its rising key averages which signal neutral to bullish price action in the near-term.

MRK

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Merck options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Merck options

16.19%

0%

0%

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.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Merck’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Merck look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

9.62%

6.02%

-32.14%

-48.28%

Revenue Growth (Y-O-Y)

-3.81%

2.32%

-34.99%

-9.38%

Earnings Reaction

3.59%

0.03%

-2.55%

-0.59%

Merck has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Merck’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Merck stock done relative to its peers, GlaxoSmithKline (NYSE:GSK), Novartis (NYSE:NVS), Pfizer (NYSE:PFE), and sector?

Merck

GlaxoSmithKline

Novartis

Pfizer

Sector

Year-to-Date Return

16.93%

2.02%

11.04%

-4.05%

7.48%

Merck has been a relative performance leader, year-to-date.

Conclusion

Merck provides essential healthcare products to consumers, animals, and companies around the world. The company has already announced its plans to buy Idenix and planning to combine the two company’s oral drugs for hepatitis C. The stock been surging higher over the last couple of quarters and is currently trading near highs for the year. Earnings have been increasing while revenues have been decreasing over the last four quarters, which has left investors pleased about recent earnings announcements. Relative to its peers and sector, Merck has been a relative year-to-date performance leader. Look for Merck to continue OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More From Wall St. Cheat Sheet: