Earnings: Pharma Firms Wrestle With Strong Dollar But Could Surprise To Upside

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Includes: CVX, MRK, PFE, XOM
by: JJ Kinahan

Summary

PFE is expected to deliver Q4 earnings of $0.52 per share on top-line sales of $13.57 billion, according to the consensus reached by analysts reporting to Thomson Reuters.

MRK earnings are expected to top the year-ago result by 4.6%, on revenues that are expected nearly 1% lower than the comparable.

Analysts are projecting a 52% drop in XOM’s Q4 profit to $0.64 a share amid a 40% drop in revenue, to $52.5 billion.

It's the halfway point for earnings season as a new month opens with a little less than half of S&P 500 (SPX) components left to report. This week offers a curious collection of companies that cut a wide path across the nation's economic horizon.

In fact, Dow Jones Industrial Average ($DJI) components dominate. Oil, pharmaceuticals, and technology-sprinkled with some retail and automotive financial results-could give investors insight into how consumers and businesses are spending and how companies are preparing and reacting.

Pharma giants Pfizer (NYSE:PFE) and Merck (NYSE:MRK) - both with deep pipelines of drug development that industry analysts expect will complement their already jam-packed drug cabinets-will open their books before the opening bell rings on Tuesday and Wednesday, respectively. TheStreet.com points out that the two have a pooled capitalization of more than $320 billion. Some perspective: that outpaces the gross domestic product of Israel ($305.68 billion in 2014).

Pfizer's Up First

PFE, a Dow Jones Industrial Average ($DJI) component and the world's largest drug maker by sales volume, is expected to deliver Q4 earnings of $0.52 per share on top-line sales of $13.57 billion, according to the consensus reached by analysts reporting to Thomson Reuters. If realized, that's $0.02 below the year-ago profit on revenue that is 3.8% higher. PFE has beat analyst expectations by at least a penny in the last 10 straight quarters.

Like most multinationals, currency fluctuations because of the strong dollar, could take a bite out of earnings. In Q3, PFE said it lost about $1.1 billion, or 9%, of its profit to the foreign-exchange exposure.

On this week's conference call, industry analysts say they will be listening for more sales and marketing news on PFE's latest cancer treatment, Ibrance, a drug that has "essentially doubled the survival rate for certain advanced breast cancer patients," according to published reports.

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Figure 1: Tough to Swallow? Shares of Pfizer ended 2015 up 3% but it was a rocky one with some deep dips. The stock is still some 20% off its early-August high. Since the beginning of the year, the stock is down 6.4%. Chart source: TD Ameritrade's thinkorswim platform. Data source: Dow Jones Global Indices. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

As for trading action leading up to this earnings release, implied volatility on PFE is in the mid-range. Options activity is heaviest at the Feb 28 put options and Feb 31 call options.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Another Beat?

MRK, also a blue chip and the fourth-largest pharma company, has drawn an analyst consensus for a profit of $0.91 per share on sales of $10.36 billion, according to the Thomson Reuters survey. Earnings are expected to top the year-ago result by 4.6%, on revenues that are expected nearly 1% lower than the comparable. MRK, too, is expected to be hit with foreign currency fluctuations. It has reported an upside surprise to investors in 10 of the last 11 quarters.

The announcement late last week that MRK got FDA approval for its Hepatitis C treatment gave the stock a boost, rising 3% on the day.

Implied volatility is tight in the mid-range. Short-term options traders expect a potential 3% move in either direction for this stock around its earnings release, according to our indicator.

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Figure 2: Under the Weather? MRK's stock finished 2015 in the hole by some 11%. Since the start of the year, it's off some 4% and down 17% since reaching a 52-week high in June. Chart source: TD Ameritrade's thinkorswim platform. Data source: Dow Jones Indices. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

A Deep Dive into Oil's Impact

The drop in oil prices to 12-year lows below $30 a barrel, peppered with periodic price swings in either direction, has largely crushed the quarterly results from oil and energy companies across the board so far. Last week, rival Chevron (NYSE:CVX) reported its first quarterly loss in more than 13 years.

Exxon (NYSE:XOM) likely hasn't been able to sidestep these challenges, either. Analysts at Thomson Reuters are projecting a 52% drop in XOM's Q4 profit to $0.64 a share amid a 40% drop in revenue, to $52.5 billion. On the conference call, analysts listening in will likely want to know how XOM is going to stem deeper crude price-related losses.

Implied volatility is sitting at the 56th percentile, which is notably below the historical range at the 91st percentile. Short-term options traders expect a potential 3% move in either direction for this stock around its earnings release, according to the TD Ameritrade thinkorswim platform's Market Maker Move indicator. Notable options activity is found in the monthly call options at the Feb 77.5 strike and the put options at the Feb 75 strike.

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Figure 3: Shares Bubbling Up? Exxon Mobil shares are off 17% in 2015 but have been climbing back to roughly flat on the year in recent sessions as oil prices clawed off 12-year lows. Energy stocks continue to influence broad-market trading. Chart source: TD Ameritrade's thinkorswim platform. Data source: Dow Jones Global Indices. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Commentary provided for educational purposes only. Past performance is no guarantee of future results or investment success.

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Disclosure: I am/we are long PFE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.