Merck: A Recession-Proof Stock To Buy Now

| About: Merck & (MRK)

By James Allen

Merck's (NYSE:MRK) current stock price has been trending upwards towards the 52-week high of over $39 back in May of 2012. The market cap is almost $3 billion less than the enterprise value. Merck's beta is typically around 0.5, while the five-year expected PEG ratio is above two. The trailing price is 17 times earnings, while Merck's forward price is only around 10 times earnings. The above numbers suggest that there is not much growth available in this stable stock that is increasing in price, while being slightly undervalued by investors.

Sales growth has increased by over 1 percent from the previous year, but has decreased by more than 4.5 percent since the previous quarter. Return on equity has increased by less than one percent over the last three quarters. The operating margin has increased by less than one percent since the end of 2011. Net margin increased by almost 6 percent from the end of 2011 to the end of March in 2012. Debt to equity ratio has been stable at 0.27 for the last three quarters. Merck's current ratio is above two and the quick ratio is over 1.6, these have been increasing for the last three quarters.

The price to earnings ratio, net margin and return on equity are all less than the industry average. The price to book ratio is also below the industry average as well. Merck & Co.'s debt to equity ratio is significantly less than the industry average, while its dividend yield is above the industry average. Both gross margin and institutional ownership exceed 74 percent. Despite inefficiencies in comparison to industry at large, the above numbers suggest that liquidity and debt are not an issue with Merck & Co. In the light of its healthy dividend yield, this is a reliable defensive stock to add to an investment portfolio.

Merck is currently facing several obstacles that impede it from substantially increasing earnings. There are also a number of factors in its favor that safeguard it from poor earnings or a substantial decrease in intrinsic value. Merck & Co should not be viewed as a growth stock. Rather, it's a defensive asset with significant potential for increased earnings and return on investment in the long-term.

There are key macroeconomic issues that can cause a dip or short-term decline in the current stock price. A lack of diversification along with staunch competition in the industry creates significant issues. The patent on Singulair is expiring and Merck & Co. will see a loss in revenue of over $4 billion annually as competitors enter the market with generic substitutes.

Merck's current exposure in Europe is also a factor that could hamper earnings and its stock price throughout 2012. It currently has a credit exposure of around $1.7 billion in countries including Italy, Ireland, Greece and Portugal as well. Merck also has some legal issues on the horizon that could have minimal impact on its stock price fluctuations throughout the year.

Merck has been undergoing a restructuring phase since 2008 in order to address some of the current issues impeding its growth and earning potential. There are key developments currently in its pipeline in order to increase gross margin and offset the expiring patents over the next few years.

Merck has enough goodwill in a unique niche to fortify it from most debilitating circumstances in the economies around the world. Merck will experience occasional dips in its stock price, but it is more recession-proof than other organizations in various industries. Prescription drugs and healthcare are always a predominant need in emerging and developed economies both domestically and internationally.

Investors will benefit from watching Merck's stock price for the most advantageous entry points to add this particular asset to their portfolio. Even as unemployment increases in Europe and other countries, healthcare and pharmaceuticals are a primary need that most people cannot delay or ignore. Merck is a defensive asset that can act as protection from inflation as well. Merck has reduced expenses and currently has treatments in phase two and three for approval concerning psoriasis, insomnia, cancer, hepatitis and other ailments. Merck also improved its dividend by four cents per quarter at the end of 2011.

Merck does expect a long-term continued source of revenue from Januvia, its diabetes pharmaceutical line. Merck is currently working towards the approval of an insomnia drug, Suvorexant. Insomnia is a $2 billion market with 18 million potential customers. Around 30 to 40 percent of the country currently suffers from mild to chronic bouts of insomnia.

Merck is currently having trouble receiving approval for Ridaforolimus, a drug designed to compete with GlaxoSmithKline's (NYSE:GSK) drug, Votrient. This is a drug intended to slow the spread of cancer in the bones of chemotherapy treatments. At this time, the FDA is requiring more clinical trials as test patients developed disorders in the heart, liver and kidneys as well. Merck is also working on the approval of Bridion, a drug intended to mitigate the after effects of anesthesia. In addition to new treatments, Merck is also working on protecting its current patents from generic products through litigation against competitors like Novartis (NYSE:NVS).

Despite the expiring patents, Merck is still a leader in the pharmaceutical industry, along with Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ). Its stock price will have dips throughout the year, but a healthy pipeline and assertive approach to managing costs, along with potential acquisitions, will ensure substantial growth in the long term for Merck. Most analysts current rate it has a buy due to its promising growth potential in the industry, along with the adequate debt and revenue levels on its balance sheet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.