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Can Merck (MRK) Keep the Earnings Streak Alive in Q3?


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Merck & Co., Inc. (MRK - Analyst Report) is set to report third-quarter 2016 results on Oct 25, before the market opens. Last quarter, the company delivered a positive earnings surprise of 1.09%.

Merck’s performance has been pretty impressive, with the company beating earnings expectations consistently. The average earnings beat over the last four quarters is 3.37%.

MERCK & CO INC Price and EPS Surprise


MERCK & CO INC Price and EPS Surprise | MERCK & CO INC Quote

Let’s see how things are shaping up for this announcement.

Factors to Consider

Merck’s new products have been doing well, with their performances being driven by products like Keytruda (cancer) and Zepatier (HCV). Strong uptake, launches in new countries and expansion into additional indications should drive Keytruda’s sales.

However, the company will continue to face headwinds in the form of genericization as well as increasing competition and the negative impact of currency exchange.

Investors will also be focused on the performance of Merck’s DPP-4 inhibitor – Januvia – including the effect of pricing pressure and whether it is losing any share to SGLT2.

Meanwhile, Remicade will continue to feel the pressure of biosimilar competition in Europe, with sales expected to decline at a rapid pace in the coming quarters. Sluggish growth of the integrase class and continued competitor dynamics in the U.S. and Europe will affect Isentress’ sales. Cubicin and Nasonex will be under pressure given the loss of exclusivity. Cubicin lost patent protection in Jun 2016 and sales are anticipated to fall significantly.

However, Merck’s cost-cutting efforts, share buybacks and other strategic initiatives should support the bottom line. Like the previous quarters, higher R&D expenses will be partially offset by lower marketing and administrative expenses.

Earnings Whispers

Our proven model does not conclusively show that Merck is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is -1.02% as the Most Accurate estimate stands at 97 cents while the Zacks Consensus Estimate is pegged higher at 98 cents.

Zacks Rank: Merck’s Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about a positive earnings surprise.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks in the large-cap healthcare sector that have both a positive Earnings ESP and a favorable Zacks Rank include:

Amgen Inc. (AMGN - Analyst Report) with an Earnings ESP of +1.79% and carries a Zacks Rank #3. It will be reporting results on Oct 27.

Bristol-Myers Squibb Company (BMY - Analyst Report) with an Earnings ESP of +4.69% and carries a Zacks Rank #3. It will be reporting results on Oct 27.

Novartis AG (NVS - Analyst Report) with an Earnings ESP of +0.84% and a Zacks Rank #3. The company is scheduled to release results on Oct 25. You can see the complete list of today’s Zacks #1 Rank stocks here.

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