(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Since the start of April, the shares of Merck & Co. (MRK) have soared by over 30% rising to more than $70, a price not seen since the year 2003. The sharp rise in the stock had skeptics thinking the shares could pullback. But instead the stock has held steady, and now technical analysis suggests the stock may rise by as much as 15%. (For more, see also: Merck: Hot Stock May Plunge as Much as 9%.)
Strong growth forecasts have driven the stock’s rise. Analysts are projecting the company’s earnings growth to speed up through the year 2020. What is even more impressive is that analysts have been increasing their earnings and revenue projections for the company throughout 2018.
The technical chart reflects the improving business forecasts and suggests the stock could rise to as high as $81.25 from its current price of around $71. That is because the stock has been consolidating sideways at a technical resistance level at $71 since the middle of September. Additionally, the stock has been rising along a bullish uptrend since the start of April. Should the stock rise above the level of resistance at $71 the next level of resistance would not come until $81.25 a price last seen in September 2001.
The period of consolidation has offered the relative strength index a chance to retreat from an overbought level above 70 back into the mid-50s. But the momentum is still bullish because the RSI has been trending higher since early February.
Rising Revenue Forecast
One reason the shares of Merck continue to rise is that the outlook for revenue growth continues to improve. Since the middle of January, analysts have been increasing their revenue outlook for the company driven by its critical cancer-fighting drugs such as Keytruda. For example, analysts' revenue estimates for 2019 have increased by over 5% and are forecast to rise to $44.1 billion. (For more, see also: Merck Stock Seen Rising 12% on Faster Profit Growth.)
Earnings estimates continue to climb because of the strong revenue growth. In fact, analysts expect earnings growth to speed up starting in the year 2019 through the year 2020. For example, analysts now expect earnings to grow by a compounded annual growth rate of almost 9% from the year 2018 through the year 2020 up from the previous forecast of just 5.7%.
This is not to say that all will be easy for Merck because as stock prices and estimates rise, so do expectations. Some times the most significant challenges a company faces are managing investors' rising expectations.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.