Is Merck a Hot Stock?

With shares of Merck (NYSE:MRK) trading around $56, 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 received FDA approval for the first of three allergy medicines in its line-up on Monday; the drug, called Grastek, targets grass pollen allergies specifically, according to a Merck press release and a recent Reuters report. Merck developed the immunotherapy drug in partnership with Denmark’s ALK Abello, and expects to launch the drug, which has been approved for patients ages 5 to 65, in the United States by the end of April. Immunotherapy drugs are a type of medicine which work by boosting the body’s immune system. In the case of Merck’s allergy medicine, the body actually becomes less sensitive to allergens; the drug actually contains some timothy grass extract and dissolves when placed under the tongue, according to Reuters.

“This important milestone marks another opportunity for Merck to build on our respiratory heritage with allergy specialists,” said Dr. Sean Curtis, vice president of respiratory and immunology at Merck Research Laboratories, in a press release Monday. Merck notes in its press release that many patients affected by grass pollen allergies decline allergy shots, despite being candidates for immunotherapy.

“With the FDA approval of Grastek, allergy specialists now have a new sublingual [under the tongue] approach to offer those patients for their grass allergies,” said Dr. David Bernstein, a professor of medicine and environmental health at the University of Cincinnati College of Medicine, in the press release. Merck says it estimates that the potential U.S. market for its new allergy medicines is around 3 million patients, and will eventually be worth as much s $1 billion in annual sales, according to Reuters.

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 poised 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

27.11%

90%

88%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Flat

Average

June 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 significant 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 Increasing 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

6.02%

-32.14%

-48.28%

-7.14%

Revenue Growth (Y-O-Y)

2.32%

-34.99%

-9.38%

-9.04%

Earnings Reaction

0.03%

-2.55%

-0.59%

-2.78%

Merck has seen increasing earnings and 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

12.07%

-1.31%

4.99%

-1.96%

4.44%

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 received FDA approval for the first of three allergy medicines in its line-up on Monday. The stock been surging higher over the last couple of quarters and is currently trading near highs for the year. Earnings and revenue figures have been rising 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.

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