Merck’s Stock Headed To $100?

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Merck

Merck’s stock (NYSE:MRK) has underperformed the broader markets as well as some of its peers over the last few weeks. While Merck’s stock grew 20% since the recent lows of March 23, the S&P 500 gained 26%. Looking at other pharmaceutical giants, Roche gained 29%, Novartis is up 19%, and Pfizer 32%. Why is that? While the healthcare sector, in general, has remained resilient throughout the crisis, thus far, Merck’s underperformance can partly be attributed to its revised guidance for the full year.

Merck is not immune to the current crisis. The company stated that it expects the COVID-related business disruptions to hurt its sales in the near term. As such, it revised its revenue guidance downwards by $2.5 billion from its previous midpoint, while EPS guidance was revised to $0.43 lower from the previous midpoint. Beyond the impact of COVID-19, generic competition for several drugs, primarily the company’s diabetes franchise (Januvia and Janumet) will likely be a drag on the company’s top line in the near term.

Having said that, Merck has a lot of positives to look forward to. To begin with Keytruda continues to see massive growth with market share gains, and this trend is expected to continue. In fact, we consider an outlier scenario of Keytruda topping $30 billion in sales, and the drug alone to be worth $200 billion, compared to total Merck’s market cap of $201 billion currently. Beyond Keytruda, the company earlier this year announced its plans to separate its Women’s Health business, and focus on its high growth businesses.

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Overall, we believe that the market overreacted to the near term concerns, and we estimate Merck’s valuation to be $102 per share – roughly 27% ahead of the current market price. Our price estimate takes into account the latest earnings as well as the company’s guidance. Our valuation is based on 4 factors: Merck’s Total Revenue, its Net Income Margin, No. of Shares, and P/E Multiple. We briefly discuss these factors below.

Keytruda To Continue To Drive Sales Growth

  • Merck’s Revenues have seen a significant increase of 16.7% from around $40.1 million in 2017 to $46.8 million in 2019 and we expect it to increase to $49.2 million in 2020, primarily led by higher Keytruda sales. A separate interactive dashboard analysis on Merck’s Revenues details how the company makes money.
  • Merck’s Non-GAAP Net Income has increased from around $10.9 million in 2017 to $13.4 million in 2019 and we expect it to increase to $14.2 million in 2020. This change is likely to be led by higher revenues and improved margins. A separate interactive dashboard analysis on Merck’s Margins highlights the company’s various expense components in detail.
  • Merck’s Non-GAAP EPS has increased from $4.00 in 2017 to $5.21 in 2019 and we expect it to increase to $5.58 in 2020. The change in EPS can be attributed to an increase in adjusted net income and a lower expected share count due to stock repurchases.
  • Our Price Estimate of $102 For Merck’s Stock implies a 18.2x P/E Multiple on expected FY2020 Adjusted EPS of $5.58. Merck’s P/E multiple is lower than Johnson & Johnson and Roche, but higher than Pfizer.

Care about Merck’s valuation? AbbVie compared to Merck is even a better bet, in our view.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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