Is Merck a Buy at These Prices?

With shares of Merck (NYSE:MRK) trading around $45, 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, which are the Pharmaceutical, Animal Health, Consumer Care, and Alliances segments, and one reportable segment, which is 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.

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T = Technicals on the Stock Chart are Mixed

Merck stock has seen a decline in its stock price over the last decade or so. However, the stock has seen a nice run over the last few years, which has taken it to a critical juncture. 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 around its key averages which signal neutral 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

19.73%

86%

85%

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

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish 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 bearish 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 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-7.14%

-40.07%

1.82%

-10.77%

Revenue Growth (Y-O-Y)

-9.04%

-4.53%

-4.44%

1.32%

Earnings Reaction

-2.78%

-3.28%

-0.32%

4.08%

Merck has seen decreasing earnings and revenue figures over most of the last four quarters. From these figures, the markets have not been too happy with Merck’s recent earnings announcements.

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P = Poor 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

10.41%

20.15%

17.16%

14.40%

15.23%

Merck has been a relative underperformer, year-to-date.

Conclusion

Merck provides essential healthcare products to consumers, animals, and companies around the world. The stock has done well in recent years but is still part of a long-term downtrend. Earnings and revenue figures have been decreasing, over the last four quarters, which has not made investors too happy. Relative to its peers and sector, Merck has trailed in year-to-date performance. WAIT AND SEE what Merck does this coming quarter.

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