Pengrowth Energy Corp. (PGH) and Merck & Co Inc. (MRK), both undervalued and providing attractive dividend yields, had received positive upgrades from analysts recently. Recent developments will be updated for both companies. Both stocks will also be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
Pengrowth Energy Corp.
Pengrowth Energy Corp. is engaged in the development, production and acquisition of, and exploration for oil and natural gas reserves in Canada. PGH was up 4.02% and closed at $4.66 on March 4, 2013. PGH had been trading in the range of $3.82-$10.21 in the past 52 weeks. PGH has a market cap of $2.39B with a beta of 1.38.
On February 28, 2013, PGH reported proved plus probable year-end reserve increased 55% to 512MMboe at December 31, 2012, from 330.5MMboe at year-end 2011. 2012 crude oil and natural gas liquids reserves increased by 29% and 79% on a proved and proved plus probable basis, respectively.
Dividend Maintained and Capital Program Fully Funded for 2013
According to the latest management discussion on Q4, 2012 earnings result, PGH is moving to be a sustainable dividend-paying energy producer. The company will invest approximately $600 million over the next 2 years to drill wells, build the surface facility to bring the Lindbergh production on-stream in 2014. Pengrowth is committed to maintaining its dividend at the current levels of $0.04 per share per month.
PGH's 2013 capital program is fully funded and will not result in incremental debt in 2013. The 2013 CapEx program of $770M and 2013 annual dividend of $250M, $1020M total required, are fully funded by expected cash flow of $680M, Weyburn proceeds of $315M and DRIP proceeds of $50M, $1045M total generated. PGH will not be taking on additional debt in 2013.
PGH is transforming to become a more sustainable energy producer. Pengrowth will emerge from this process a transformed company with a much higher oil rating, lower decline rates and much greater cash flow.
There are a few positive factors for PGH:
- Lower P/B and P/S of 0.6 and 1.4 (vs. the industry average of 1.7 and 2.8)
- Lower share price of $4.66 (vs. the book value of $10.35 per share)
- PGH is currently offering an annual dividend yield of 10.12%
Technically, the MACD (12, 26, 9) had turned to show a bullish sigh in the last trading day. RSI (14) is picking up and indicating a bullish lean at 56.53. PGH is approaching its 50-day MA of $4.70 and is still below its 200-day MA of $5.97. The next support is $3.70, the S1 pivot point, followed by $3.28, the S2 pivot point, as seen from the chart below.
How to Invest
According to PGH's management, PGH's current 10% plus dividend is well funded for 2013. If the company can successfully transform to become a more sustainable energy producer, there is much more upside for PGH. For bullish investors, a credit put option spread of July 20, 2013 $3/$4 can be reviewed. Investors can also review the following ETF to gain exposure to PGH:
Canadian Energy Income ETF (ENY), 3.00% weighting
Merck & Co Inc.
Merck & Co Inc. is a global healthcare company that makes pharmaceutical products to treat conditions in a number of therapeutic areas, including cardiovascular disease, asthma, infections, and osteoporosis. MRK was up 1.67% and closed at $43.34 on March 4, 2013. MRK had been trading in the range of $36.91-$48.00 in the past 52 weeks. MRK has a mark cap of $131.76B with a very low beta of 0.32.
On March 4, 2013, BofA/Merrill Lynch upgraded MRK from neutral to buy. Analysts have a mean target price of $48.37 and a median target price of $47.00 for MRK. Analysts are estimating an EPS of $0.78 for the current quarter ending in March 2013. For 2013, analysts are projecting an EPS of $3.64 with revenue of $46.29B, which is 2.10% lower than 2012. On February 26, 2013, Merck had declared a quarterly dividend of $0.43 per share for Q2, 2013, payable on April 5, 2013 to stockholders of record at the close of business on March 15, 2013.
In February, 2013, Merck had entered into an agreement with Samsung Bioepis Co., Ltd. for the development and commercialization of several pre-specified and undisclosed biosimilar candidates, where Merck will be responsible for commercialization. According to Zacks, Merck is looking towards biosimilars to drive long-term growth, where the biosimilars market represents huge commercial opportunity with more than $60B of biologic sales slated to lose patent protection through 2017.
There are a few positive factors for MRK:
- Higher revenue growth (3 year average) of 19.9 (vs. the industry average of 6.9)
- Lower debt/equity of 0.3 (vs. the average of 0.4)
- Lower P/B and P/S of 2.4 and 2.8 (vs. the industry averages of 3.1 and 2.9)
- Lower Forward P/E of 11.2 (vs. the S&P 500's average of 14.0)
- MRK currently offers an annual dividend of 3.97%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. The momentum indicator, RSI (14), is showing a bullish lean at 59.82. MRK is currently trading above its 50-day MA of $42.25 and 200-day MA of $42.34. The next resistance is $43.85, the R1 pivot point, followed by $44.96, the R2 pivot point, as seen from the chart below.
How to Invest
MRK continues to be a great long-term holding with its solid balance sheet and steady cash flow. With current Forward P/E of 11.2, MRK is undervalued compared to its peers. For bullish investors, a credit put option spread of May 18, 2013 $39/$41 put can be reviewed. Investors can also review the following ETFs to gain exposure to MRK:
- Health Care Select Sector SPDR ETF (XLV), 7.99% weighting
- First Trust Morningstar Dividend Leaders Index Fund (FDL), 7.90% weighting
- iShares Dow Jones U.S. Pharmaceutical Index Fund (IHE), 7.72% weighting
- iShares Dow Jones U.S. Healthcare Index Fund (IYH), 7.46% weighting
- Vanguard Healthcare ETF (VHT), 7.38% weighting
Note: All prices are quoted from the closing of March 4, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Additional disclosure: May initiate a long position in PGH