What’s Next For Merck Stock After A 5% Drop Following Q1 Miss?

[Updated: 4/30/2021] Merck Stock Decline

The stock price of Merck (NYSE:MRK) has seen a 5.5% drop over the last five trading days, after the company announced Q1 results that came in below the street estimates. Merck’s Q1 revenue of $12.1 billion was unchanged compared to the prior year quarter, and lower than our estimate of $12.8 billion as well as the $12.7 billion consensus estimates. While the company saw strong growth in its oncology segment, with Keytruda garnering $3.8 billion (up 19% y-o-y) during the quarter, the vaccine sales remained tepid due to the impact of Covid-19. Gardasil sales, in particular, were down 16% to $917 million during the quarter.

Looking at the company’s bottom line, the adjusted EPS of $1.40 per share (down 7% y-o-y) was lower than our forecast of $1.65, and the $1.63 consensus estimate. The decline in earnings can be attributed to lower margins largely due to increased costs owing to the pandemic.

The investors weren’t happy with Merck’s Q1 performance and the stock declined over 4% in a single trading session, post the earnings announcement. Now that half of the U.S. population has received at least one dose of vaccine, the economy is expected to open up gradually, boding well for Merck stock over the coming quarters.

Going by historical performance, there is a solid 78% chance of a rise in MRK stock over the next month. Out of 59 instances in the last ten years that MRK stock saw a five-day decline of 5.5% or more, 46 of them resulted in MRK stock rising over the subsequent one month period (twenty-one trading days). This historical pattern reflects 46 out of 59, or about a 78% chance of gain in MRK stock over the coming month. Furthermore, Merck has kept its revenue and adjusted earnings guidance unchanged for the full year, and we also maintain Merck’s Valuation of $101, based on an EPS estimate of $6.60 and a P/E multiple of 15x in 2021, reflecting a large 36% premium to the current market price of around $74.

At the current market price of $74, MRK stock is now trading at just 11x its 2021 EPS estimate of $6.60. The 11x figure compares with levels of over 17x seen in 2018 and 2019, and a 14x figure seen as recently as late 2020. We continue to believe that MRK stock is significantly undervalued and it can offer high returns going forward.

[Updated: 4/28/2021] Merck Q1 Earnings Preview

Merck (NYSE: MRK) is scheduled to report its Q1 2021 results on Thursday, April 29. We expect the company to likely post revenue and earnings above the consensus estimates, led by continued expansion of Keytruda, and a recovery in the company’s vaccines as well as the animal health business. Merck should see an overall pickup in demand due to an increase in hospital visits with economies opening up gradually. We expect the company to navigate well based on these trends over the latest quarter.

Furthermore, our forecast indicates that its valuation is $101 per share, which is 31% above the current market price of around $77. Our interactive dashboard analysis on Merck’s Pre-Earnings has additional details.

(1) Revenues expected to be above the consensus estimates

Trefis estimates Merck’s Q1 2021 revenues to be around $12.8 billion, slightly above the $12.7 billion consensus estimate. Now that the economies are opening up with vaccination programs underway in multiple countries, pharmaceutical companies will likely benefit from an increase in the volume of new patient starts. For Merck, Keytruda remains the key growth driver in the near term, with 2021 annual sales projected to be $17 billion, per Trefis estimates. Earlier in 2020, Merck’s vaccines, such as Gardasil and ProQuad saw pressure on sales as the focus remained on Covid-19. However, this trend is expected to reverse and Gardasil is likely to see higher sales growth going forward. Merck’s Q4 2020 sales were up 5% y-o-y to $12.5 billion, primarily reflecting continued growth in Keytruda sales, a strong rebound in Gardasil sales, as well as higher Animal Health products sales. Our dashboard on Merck Revenues offers more details on the company’s segments.

2) EPS likely to be slightly above the consensus estimates

Merck’s Q1 2021 adjusted earnings per share (EPS) is expected to be $1.65 per Trefis analysis, slightly above the consensus estimate of $1.63. Merck’s adjusted net income of $3.4 billion in Q4 2020 reflected a 12% rise from its $3.0 billion figure in the prior-year quarter, due to margin expansion. The margins will likely improve further going forward, as the current Covid-19 crisis subsides. For the full year 2021, we expect the adjusted EPS to be higher at $6.60 compared to $5.94 in 2020.

(3) Stock price 30% above the current market price

Going by our Merck’s Valuation, with an EPS estimate of $6.60 and a P/E multiple of 15x in 2021, this translates into a price of $101, which is 31% above the current market price of around $77. In fact, at the current market price of $77, MRK stock is trading at just 12x its 2021 EPS estimate of $6.60. The 12x figure compares with levels of over 17x seen in 2018 and 2019, and a 14x figure seen as recently as late 2020. We continue to believe that MRK stock is significantly undervalued and it can offer high returns going forward.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year.

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