Merck and Company, Inc. (MRK) is one of the largest drug makers in the world. It develops and manufactures pharmaceuticals, vaccines and a number of consumer health products. Merck shares have surged in the past 4 months, rising from about $37 in June, to over $47 per share today. However, it might be time to take profits and wait for what could be a fair sized correction in the stock. Here are some points investors should consider:
1) The stock could be topping out right now. Merck shares recently hit a new 52-week high and it now trades well above key support levels. The 50-day moving average is currently $44.42 per share, and the 200-day moving average is $39.97 per share. That means the current share price is extended beyond these key averages, and investors should be wary as the recent advance might not be sustainable. It would be normal for the stock to pull back and consolidate for awhile after the run it has experienced.
2) Earlier this year Merck was yielding nearly 5% and it was trading for about 9 times earnings. But the share price advance has made the current yield and valuation far less attractive. Merck now yields just 3.6% and it trades for about 13 times earnings.
3) Lack of earnings growth: While many pharmaceutical companies are expected to show growth, analysts expect Merck to earn less in 2013 than in 2012. Companies that show little or negative earnings growth are often valued at below market PE ratios. Companies that lack growth are also less likely to offer dividend increases, and that can limit the share price.
4) Earnings and guidance risk: Merck is expected to report third quarter earnings on Friday, October 26, 2012. Now that we are in the midst of earnings season, investors can easily see what happens when a company reports earnings that are not quite as exciting as the share price. When a stock is trading at or near a 52-week high, the company needs to report earnings or guidance that can keep the share price at lofty levels. If not, a big decline can occur when earnings are reported. For example, Google (GOOG) recently reported earnings that disappointed some investors. Google's share price was trading near 52 week highs, but the stock was slammed after the earnings announcement and it dropped about 9%. A similar story played out with another pharmaceutical company when Abbott Laboratories reported earnings. Abbott shares had recently hit new 52-week highs at just over $72, but disappointing earnings and a halt on a kidney drug trial, took the stock down substantially. With Merck near 52-week highs, it makes sense to consider selling now before earnings, and then waiting for a better buying opportunity.
Here are some key points for MRK:
Current share price: $47.93
The 52 week range is $32.31 to $47.99
Earnings estimates for 2012: $3.81 per share
Earnings estimates for 2013: $3.72 per share
Annual dividend: $1.68 per share which yields 3.6%
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