Market Overview

Is Merck & Co., Inc. A Leader In A Red Hot Market?

Is Merck & Co., Inc. A Leader In A Red Hot Market?
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Merck & Co., Inc. (NYSE: MRK) stock has been on a steady incline for the most part since the 2009 bottom. With the stock now challenging 2007–2008 highs, will the underlying fundamentals be enough to incite an upside breakout?

Merck shareholders have enjoyed a nice ride higher from the low $20s in 2009 to more than $60 currently, with a nice 3 percent dividend to boot. However, with the stock at these levels and resistance from the 2008 highs just ahead, does Merck have the fundamental catalysts to justify even more of an upside move?

The Bullish Argument

The bulls love the company's dividend, cash balances, clean balance sheet and huge ongoing positive cash flows. Here are some of the bullish highlights in the Merck case:

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  • A still-reasonable price-to-sales ratio of 4.01
  • An enterprise value that trumps the market capitalization of the stock
  • Net profit margin of more than 10 percent and gross operating margins of more than 20 percent
  • Clean balance sheet:
  • Current ratio of 1.87
  • Debt-to-equity ratio of 47.57 percent
  • Huge cash reserves of over $13 billion
  • Enormous, consistent levered free cash flow of over $10 billion
  • A technically bullish chart with three uptrend lines supporting the stock

The Bearish Argument

The bears are quick to point out that while the stock has some nice fundamentals, it must have those fundamentals and more, because it is priced for perfection. They also note that such a large company with minuscule revenues cannot go up indefinitely. Here's a summary of the bearish argument against Merck shares:

  • The company is richly valued with a price-to-book ratio of 3.63
  • The price-to-earnings ratio of 32 is high when compared with estimated negative revenue growth and only 3 percent earnings growth for next year
  • The stock is sporting an RSI reading very near overbought on the weekly chart (to say nothing of the already overbought reading on the daily chart)
  • The stock is trading right below long-term horizontal line resistance at $61.62, reason enough for a pullback or consolidation phase, they note.

The Technical Take

At this advanced stage of the Merck rally, technicians are bullish toward shares as long as the uptrend lines hold up as support, but agree that a pause in the upside action could be healthy for the stock in the long run. They note that a very short-term pullback to $57 or so should not be a surprise to anyone and that a bit deeper of a pullback to the $50-$55 range could easily occur with no real damage being done to the bullish chart.

Any break and close above the $61.62 resistance level, however, may well lead to even further upside action in the short term. Above $61.62, the next resistance does not come into play until north of $67.

The author holds no positions in any securities mentioned.

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