Does Merck Have a Bright Future?

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.

Merck, known as MSD outside the United States and Canada, announced financial results for the third quarter of 2013. “This quarter we delivered solid financial results, with strong contributions from our vaccine, immunology and HIV businesses, and effective cost management,” said Kenneth C. Frazier, chair and chief executive officer, Merck. “We are improving productivity and focusing our R&D and commercial resources more precisely to enable our investments in the best opportunities for innovation and growth. We are encouraged that our combination hepatitis C regimen has joined our anti-PD-1 immunotherapy in being designated as a ‘breakthrough therapy’ by the FDA.”

T = Technicals on the Stock Chart are Mixed

Merck stock has been in a range over the last several years. The stock is continuing to trade at its lows slightly above its all time lows. 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 inbetween its rising key averages, which signal neutral to bearish 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

21.42%

50%

48%

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

Put IV Skew

Call IV Skew

November Options

Average

Average

December Options

Average

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 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 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

-2.30%*

-0.59%

-2.78%

-3.28%

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

* As of this writing

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

11.06%

20.52%

24.91%

22.21%

20.67%

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 been in an up and downtrend over the past few quarters, but is currently trading at its lows slightly above its all time lows. 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 been an underperformer in its year-to-date performance. WAIT AND SEE what Merck does this coming quarter.

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