35% Upside For Merck’s Stock?

-7.10%
Downside
132
Market
122
Trefis
MRK: Merck logo
MRK
Merck

Merck (NYSE:MRK) could see a 35% upside from the current levels, based on our price estimate of $96, which is based on expected 2020 earnings of $5.85 on an adjusted basis, and a price to earnings multiple of 16.4x. Merck’s stock has seen a  15% drop since February 1 (through March 18), after the WHO declared a global health emergency. The markets have been on a decline since, amid fears of global recession after the coronavirus outbreak outside of China, and oil price war. Merck in particular will likely outperform the broader markets, when the current crisis winds down, given that Keytruda will continue to drive its earnings growth. Even after the 2008-09 crisis, Merck outperformed the broader markets during recovery. In this analysis, Merck Valuation: Expensive Or Cheap?, we arrive at our price estimate based on the company’s revenue, adjusted net income margin, no. of shares, and price to earnings multiple. We discuss more on these factors in the below sections.

#1. Estimating Merck’s Total Revenues

  • Total revenues have increased from $39.8 billion in 2016 to $46. 8 billion in 2019, and they could grow to $51.6 billion in 2020.
  • Our interactive dashboard analysis, MRK Revenues: How Does Merck Make Money, provides an in depth view of the company’s revenues.
  • While the current coronavirus outbreak could result in supply disruptions, but we don’t expect any significant impact on the company’s revenues in 2020.
  • For more detailed charts and a timeline of the 2008 and 2020 crisis for different stocks, view our interactive dashboard analyses on coronavirus.

#1.1 We compare trends in Merck’s total revenues with that of its peers in Merck’s valuation dashboard.

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#2. Deriving Merck’s Adjusted Net Income

  • Adjusted Net Income grew from $10.5 billion in 2016 to $13.4 Billion in 2019, and we expect it to be around $14.8 billion in 2020.
  • This growth will likely be led by higher revenues, and a modest growth in net income margin, likely driven by reduced promotional expenses toward legacy brands, which the company plans to spin-off.
  • The jump In Adjusted Net Income Margin since 2018 can be attributed to the impact of the U.S. Tax Act.
  • We provide details on the company’s expense items in our interactive dashboard analysis, MRK Expenses: How Does Merck Spend Its Money?

#3. Determining Merck’s Adjusted EPS

  • Adjusted EPS has grown from $3.78 in 2016 to $5.19 in 2019, and we estimate it to be $5.85 in 2020.
  • EPS growth from 2018 can be attributed to higher Adjusted Net Income.

#4. Estimating Merck’s Stock Price

  • Our price estimate of $96 for Merck is based on our Detailed Valuation Model, and implies 16.4x P/E Multiple on expected 2020 Adjusted EPS of $5.85.
  • The current market price of Merck implies a P/E multiple of 12.1x based on $5.85 adjusted EPS for 2020. The P/E has fallen over the past month or so, due to the fall in markets post the coronavirus outbreak.
  • We also compare the current coronavirus crash to 4 other market crashes here.

#4.1 Comparing Merck’s Historical P/E Multiple With That of Its Peers

  • P/E Multiples are based on average share price during Q4 of year, and reported adjusted EPS for the full year.
  • Merck’s P/E Multiple has been higher than that of Pfizer, Johnson & Johnson, and Roche.

See all Trefis Price Estimates and Download Trefis Data here

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