Why Analysts See Big Upside in Apple, GE and Merck After Earnings

Jon C. Ogg

Investors have had to interpret a lot of data in this aging bull market and ahead of the election. Despite the recent volatility, the one undeniable trend is that investors have been willing to buy stocks into every market sell-off. That won’t be the case forever, but that has been true for five years or so.

24/7 Wall St. reviews dozens of analyst research reports each morning of the week. The goal is to find new investing ideas and trading ideas for our readers. Some of these analyst research reports cover stocks to buy, and some of these end up covering the top stocks in the Dow Jones Industrial Average.

Investors need to consider many sorts of issues when it comes to buying a stock. How much risk is there? How much potential upside is there? Is the stock viewed as cheap, or does it have a premium because of its position today? Does it pay a dividend and/or does it buy back stock? How is its balance sheet and how solid are the business prospects?

The ending on October 28 was the week that the earnings floodgates flew wide open. High valuations in general and the notion that the bull market is seven and a half years old just are not stopping investors from having an appetite.

24/7 Wall St. tracked three unusual research patterns emerging out of the 30 Dow stocks in the week ending October 28.

The Big Apple Isn’t Just New York City

Apple Inc. (NASDAQ: AAPL) had a very unusual earnings report. Earnings and guidance were all in all pretty good, but CEO Tim Cook seemed uncertain how to capitalize on Samsung’s smartphone woes. Despite these issues, Apple’s consensus analyst price target has now climbed back above $130. Right before Apple’s earnings report, its consensus price target was $128.81, and was $126.73 just 30 days ago and $124.11 some 60 days ago.

Within two days of earnings, 24/7 Wall St. tracked 13 key analyst changes. These were from the likes of Stifel, Credit Suisse, Mizuho, Merrill Lynch, S&P, Barclays and many more key firms. Apple shares were trading at $113.69 upon Friday’s closing bell, down from $118.25 earlier in the week before earnings. Apple has a 52-week range of $89.47 to $123.82.

Conglomerate City

General Electric Co. (NYSE: GE) has seen a moderate downward trend on its consensus analyst price targets going into and after its third quarter earnings failed to impress. But with shares still trading under $30, it was interesting to see that Merrill Lynch not only reiterated its Buy rating but maintained its $37 price objective. That is a full $5 higher than what is now the consensus target, and the report even noted how GE’s third quarter was underwhelming and that the $2.00 earnings per share target would require more cost cuts and more cash deployment to hit. Still, the firm noted:

We expect GE to stand out as one of the better growth stories in our large-cap space at the end of 3Q earnings season. GE did not back away from the $2 EPS by 2018, but highlighted that more cost-cuts and buyback are required to get to the goal.

It is important to know that this is a tie for GE’s highest analyst target price. GE closed at $29.22 on Friday, and that was after a 2% gain on hopes of a Baker-Hughes partnership for its oil and gas services. GE’s consensus analyst target is $32.00 (versus $33.71 just 90 days ago), and its 52-week range is $27.10 to $33.00.

Big Pharma

This past week, Argus reiterated Merck & Co. Inc. (NYSE: MRK) at Buy, but what stood out was that the drug giant’s price target was raised to $80 from $65. That was up over 30% from the $60.87 prior close, plus there is the 3% dividend yield. Argus sees earnings growth driven by strong sales of oncology drug Keytruda, Zepatier for hepatitis C,and Gardasil for HPV. The Argus report said:

Merck shares trade at 15 times our 2017 earnings per share estimate, above the average multiple of 13.9 for our coverage universe of pharmaceutical stocks. While Merck carries a premium valuation, we believe the company has a strong pipeline of new drugs that could contribute meaningfully to revenue over the next five years… We believe that Merck has a strong product pipeline and that Keytruda has substantial opportunities as a treatment for solid tumors, such as lung cancer, melanoma, and head and neck cancer. Recently approved and forthcoming indications for Keytruda, along with growth from Zepatier and Gardasil, should contribute significantly to future sales growth.

Investors might want to notice that the consensus price target was $68.32 on Friday, and that consensus target is up over 10% in the past 90 days. Also note that Merck’s absolute highest price target is now up at $82.00, and it has a 3% yield. Merck shares closed down 4% at $58.84 on Friday, in a 52-week range of $47.97 to $64.86.