Can Merck Continue to Surge Higher?

With shares of Merck (NYSE:MRK) trading around $53, 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 health care 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 health care 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 health care field.

Merck is considering its options for its animal health and consumer-care operations and plans to carry out any moves this year. The pharmaceutical company said it “could reach different decisions” about the businesses. Merck’s comments follow reports last week that the company is in talks with Novartis (NYSE:NVS) about the Swiss pharmaceuticals company swapping its animal-health and human vaccines businesses for the U.S. drug maker’s over-the-counter health-products unit. As part of a plan announced in October, Merck expects to cut annual operating costs by $2.5B by the end of 2015 versus 2012, with $1B to be realized by the end of this year. Meanwhile, Merck has started the process of applying for approval of its MK-3475 immunotherapy for patients with advanced melanoma who have stopped responding to Bristol-Myer Squibb’s Yervoy. Merck expects to complete the initial filing this year.

T = Technicals on the Stock Chart Are Strong

Merck stock has been in a range over the last several years. However, the stock is currently surging higher 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

23.77%

96%

93%

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

February Options

Flat

Average

March 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 Decreasing 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-32.14%

-48.28%

-7.14%

-40.07%

Revenue Growth (Y-O-Y)

-34.99%

-9.38%

-9.04%

-4.53%

Earnings Reaction

-2.55%

-0.59%

-2.78%

-3.28%

Merck has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about 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

6.35%

-2.57%

0.24%

0.13%

2.03%

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

Conclusion

Merck provides essential health care products to consumers, animals, and companies around the world. The company is considering its options for its animal health and consumer-care operations and plans to carry out any moves this year. The stock been in an up-and-down trend over the past few quarters and is currently surging higher. Earnings and revenue figures have been decreasing over the last four quarters. However, investors are optimistic about recent earnings announcements. Relative to its peers and sector, Merck has been a relative year-to-date performance leader. Look for Merck to OUTPERFORM.

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