(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Merck & Co. Inc. (MRK) shares have dramatically outperformed the S&P 500 this year, rising 10%. Those gains may be just the start. Analysts are looking for the stock to rise by nearly 12% higher to about $69. This bullish view comes as analysts see accelerating earnings growth in the coming years.
The analysts aren't the only ones all bulled up on the pharmaceutical company. Options traders are betting the stock advances roughly 6% by the middle of August. One reason for the bullish optimism is the companies cancer-fighting drug Keytruda, which has helped to revive the company and is delivering robust revenue growth.
Analysts have been upping their price target on the stock since the start of the year, with the target rising by nearly 6%, and they now see the stock rising to an average analyst price target of $69.05, ccroding to data from YCharts. The bullish outlook for the stock stems from expectations for the company's earnings to accelerate from 6% growth in 2018 to over 10% by the year 2020.
Options traders are overwhelmingly bullish on Merck as well, with the number of bets that Merck will rise by expiration on Aug. 17 massively outweighing the number of bets it will fall by nearly 13 to 1, with almost 18,000 open call contracts at the $62.5 strike price. Additionally, the calls at the $65 strike price have seen an increase of more than four times since the start of July to over 38,000 open contracts. The $65 calls cost about $0.55 per contract, and a buyer of the calls would need the stock to rise to $65.55 to break even if the options are held until expiration, a rise of about 6%.
One of the Cheapest in the Group
Merck is also one of the cheapest of the big pharmaceutical companies, trading at 13.7 times 2019 earnings estimates. Only Pfizer Inc. (PFE) trades at a more reasonable valuation at 12. Johnson & Johnson (JNJ), Bristol-Myers Squibb Co. (BMY ) and Eli Lilly and Co. (LLY) all trade at roughly 15 times one-year forward earnings estimates.
The bullish outlook among analysts and traders would suggest that the stock may be heading higher in the coming weeks. Earnings for the company are due by the end of the month, and should the results be robust along with strong guidance, the stock may very well be on its way higher.
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.