Will Merck Continue to Rise With Recent News?

With shares of Merck (NYSE:MRK) trading around $54, 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 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 is stepping up its push into a new class of copycat medicines that offer hope of lower drugs bills for national healthcare systems while threatening rival pharmaceutical companies with a fresh wave of competition. Karl-Ludwig Kley, chief executive of the German group, said that he expected “biosimilars” — cheaper copies of expensive biological drugs — to become an important new market as governments around the world seek to lower healthcare costs. Biosimilars have been slow to take off because the complex nature of biological drugs, made from living cells and used to treat a growing range of diseases, means that they are harder to replicate than traditional chemical-based pills. But Mr Kley said that Merck had “all the capabilities to compete in biosimilars” and expected significant growth in the market by “the second half of this decade”.

The German drugs and chemicals group has struck partnerships in India and Brazil to develop the products, highlighting appetite from emerging markets for access to affordable medicines and for expertise to help build domestic drug industries. Merck agreed last November to work with Bionovis of Brazil on six biosimilars for cancer and arthritis following a similar deal with Dr Reddy’s Laboratories of India.

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

23%

83%

80%

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

March Options

Flat

Average

April 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 rising 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

9.39%

-1.07%

0.21%

1.83%

3.59%

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 is stepping up its push into a new class of copycat medicines that offer hope of lower drugs bills for national healthcare systems. 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 OUTPERFORM.

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