Sunday, May 17, 2009

MRK - Merck & Co Inc.


MRK - Drug Manufacturers - Major

MRK is one of my favorites. Look the daily chart. It seems like a H & S bottom. Look at the volume, the neckline and the technical indicators.


On the volume, this is what we can expect in a H & S bottom pattern:

Volume levels during the first half of the pattern are less important than in the second half. Volume on the decline of the left shoulder is usually pretty heavy and selling pressure quite intense. The intensity of selling can even continue during the decline that forms the low of the head. After this low, subsequent volume patterns should be watched carefully to look for expansion during the advances.

The advance from the low of the head should show an increase in volume and/or better indicator readings, e.g., CMF > 0 or rise in OBV. After the reaction high forms the second neckline point, the right shoulder's decline should be accompanied with light volume. It is normal to experience profit-taking after an advance. Volume analysis helps distinguish between normal profit-taking and heavy selling pressure. With light volume on the pullback, indicators like CMF and OBV should remain strong. The most important moment for volume occurs on the advance from the low of the right shoulder. For a breakout to be considered valid, there needs to be an expansion of volume on the advance and during the breakout.


Weekly Chart:

MRK need a little help of the Dow Jones to take-off. I am considering going short on the Dow and Long on MRK. Cover MRK with an inverse ETF. A good entry point could be after the brake of the neckline (30 USD) or any price on the dynamical support. In case of confirming the head & shoulders, the objective is the level of 40 USD.

Fundamentals:

Merck & Co., Inc. (Merck) is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a range of products to improve human and animal health. The Company's operations are principally managed on a products basis and comprises of two business segments: the Pharmaceutical segment and the Vaccines and Infectious Diseases segment. The Pharmaceutical segment includes human health pharmaceutical products marketed either directly or through joint ventures. These products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. Merck sells these human health pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers, such as health maintenance organizations and pharmacy benefit managers. In March 2009, Insmed Incorporated closed the sale of its assets related to the follow-on biologics business, to a subsidiary of Merck & Co., Inc.

Valuation Ratios:

Price/Earnings (TTM) 9.14x - (MRK reported 1st quarter 2009 earnings of $0.74 per share on April 21, 2009, down 17% from $0.89 per share in Q1 2008.) Analyst expects $0.78 per share for the Q2 2009.

Price/Sales (TTM) 2.29x

Price/Book (MRQ) 2.75x

Price/Cash Flow (TTM) 7.05x

Book Value Per Share (mrq): $ 9.277

Because MRK is in the Major Drugs industry and has positive earnings, the PEG, PE, and Price to Book ratios are the most appropriate valuation measures. The Price to Sales ratio is less instructive than the PEG or PE since the company has positive earnings. Therefore MRK seems expensive with a PEG value of 2.0119, above the Major Drugs industry median PEG of 1.44, however their PE is only 9.1408, among the lowest in the industry.

Solvency:

MRK's debt to total capital ratio, at 23.45%, is in-line with the Major Drugs industry's norm despite its increase over the last year. The company's balance sheet shows that liquid assets are plentiful enough to service current liabilities in the event that operating earnings are unable to.

Profitability:

MRK is one of the more profitable companies in the Major Drugs industry with a net margin of 25.33%. Its operating margin and net margin are among the strongest of any peer while its gross margin is above the industry median.

Dividends:

MRK pays an annual dividend of $1.52 which, at its current stock price, produces a yield of 5.84%%, above both the Major Drugs industry average of 4.38% and the average stock in the S&P 500 Index at 3.00%. This is even more impressive since most companies in the Major Drugs industry do not pay a dividend.

Revenues:

MRK grew earnings in the face of decreased revenues over the past twelve months. This is a trend that is not sustainable if profits are to continue to grow at this rate. However, this result was better than that of the average company in the Major Drugs industry.

MRK is overall quite efficient in comparison to it's peers with a Return on Assets, Return on Equity, and Revenues Per Employee of 12.67%, 30.35%, and $424,154.00 respectively. Despite average performance at managing their resources, the company is among the best at managing their owner's equity and at generating revenues from employees compared to other companies in the Major Drugs industry.

Financial strength:

MRK's debt to total capital ratio, at 23.45%, is in-line with the Major Drugs industry's norm despite its increase over the last year. The company's balance sheet shows that liquid assets are plentiful enough to service current liabilities in the event that operating earnings are unable to.

INSIDERS:

There is no important insider activity, but they are buying.

http://finance.yahoo.com/q/it?s=MRK

http://www.insider-monitor.com/trading/cik64978.html

NEWS:

Drug Industry hits back as EU finalizes probe

http://www.reuters.com/article/marketsNews/idINLE91694420090514?rpc=44

Health-Care Reform and the 'Innovation Test'

http://online.wsj.com/article/SB124227053842018311.html

Cramer: Prepare for Sector Rotation?

http://www.cnbc.com/id/30726780/site/14081545?__source=yahoo|headline|quote|text|&par=yahoo

Principal sources: Reuters, TD Ameritrade, Yahoo finance and Finviz.com & Stokchcharts.com.

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